Housing Market

Elegy for Estate Agents

The Independent reports that ”up to 1,800 estate agents may go bust by the end of the year unless lenders ease up their squeeze on new mortgages, as fears grow that the UK is heading for a full-scale housing crash, with price falls of up to a fifth.”

Maybe the warm weather has dulled my sense of sympathy, but I cannot help thinking that this will be good news for the housing sector as a whole. The property boom has lasted long enough for estate agents to make plenty of money and the best ones should have little difficulty surviving - the true test of an estate agent is the deal that they can provide for the home-seller during difficult times. A phase of Darwinian ‘survival of the fittest’ will be no bad thing.  Rosie Millard writes in the Sunday Times:

“Well, there’s a silver lining in that somewhere. With nobody selling any property — at least not for about another five years — all the estate agencies will go out of business, which means high streets up and down the country will become a bit more interesting, as they will start having proper shops on them again. Except that nobody’s going to have any money to spend in them, so they will all go bust too.”

Property - then and now

Conditions in the UK housing market seem to get tougher by the day. The latest data on home repossessions is pretty dire - the Times reports that “Home repossession orders are nearing the level last seen in the recession of the early 1990s after rising by 16 per cent in the first quarter of this year.” and a fresh cluster of announcements about higher mortgage costs and tightening lending criteria have come from various mortgage lenders. In the short run there is really not much that the government can do to prevent even higher levels of property repossessions (or foreclosures), one danger is that fire-sales of repossessed properties will increase the supply-demand balance and drive prices down even quicker that forecast.

I liked this piece from the Money Central section of the Times website which cast a glance back to the last time that the UK property sector was in deep doo daa - how different are the market conditions in 2008 compared to the early 1990s? A good read for students wanting some historical perspective to build into their exam answers.

Developments in the housing market

A selection of recent newspaper articles on the developments in the UK housing market

House price falls won’t send the UK into a recession
David Miles (a brilliant housing market economist)

Britain’s biggest homebuilder halts new projects
The Guardian

IMF gives bleak warning on dangers of global recession
The Times

UK housing slump fears overplayed
Financial Times

UK house prices will fall almost 20pc in next two years
Daily Telegraph

The social curse of the property boom

Charles Moore provides a welcome dose of reality in his article in today’s Telegraph. There will be victims of the housing recession - but Moore builds a convincing argument. Rising house prices do not create much in the way of meaningful wealth - they are simply a way of transferring wealth from one generation to another.

He writes

“The social benefit of property ownership is that it meets the human need for security and the human aspiration to rise in the world and establish oneself and one’s family. Soaring property prices kill both these things for the majority: they are a social curse.”

The remainder of his article “Why is everyone worried about house prices?” is here

Sub prime risks for the UK

We tend to think of the sub-prime mortgage crisis as being largely concentrated in the United States. But there is a growing body of evidence that some parts of the UK are also heavily exposed to the risks of a sub-prime crisis. The Financial Times today carries an interactive map which highlights those towns and cities thought to be most at threat from a rise in housing repossessions. According to research from FitchRatings, mortgages made to subprime borrowers – home owners with a shaky credit history – account for 10 to 11 per cent of all private homes in six UK towns - namely Newport, Wales; Cleveland, Teesside; Wolverhampton; Cardiff; Manchester; and Galashiels, Scotland.

Buy to let - a problem of over-supply?

The Financial Times carried a super short piece on the buy to let market today - ideal for students preparing for AQA Unit 3 - Markets at Work. According to the piece

“Rents are tumbling on some city centre flats (in cities such as Liverpool and Nottingham) as buy-to-let investors pay the price for oversupply.....The news will make uncomfortable reading for investors who bought into the boom in development of buy-to-let flats in these city centres, only to find that capital values and now rental income are falling......The cost of renting compared with the cost of servicing a mortgage on an equivalent flat or house has narrowed significantly over the year to the end of March, with both increasing. Rental costs were 75 per cent of mortgage costs in the first quarter of 2007, rising to almost 81 per cent in the first quarter of 2008.”

Have a read of the article and think about the position from the point of view of the buy to let landlord - what are the costs and benefits of their investment in the property market - and also from the point of view of tenants looking for somewhere to live.

(i) Using a supply and demand diagram, explain how a situation of over-supply can occur and what happens to prices as a result

(ii) What might happen to the property market in Nottingham if some buy-to-ler investors decide to sell some of their stock of properties?

The rest of the article can be found here

Policy conflict for the UK economy?

The IMF is forecasting a slowdown in global growth to 3.7% in 2008 and 2009. This is in contrast to recent growth rates of over 5%.

Chart of the Day: Falling UK House Prices

No surprises for our choice of chart of the day!

House prices have seen their biggest monthly drop since the 1990s recession, according to Halifax Bank of Scotland - the UK’s biggest mortgage lender. Let us include the usual caveat that you should never read too much into one month of data - but it seems to me that virtually of the housing market indicators including many of the forward-looking confidence surveys from households, estate agents and construction companies are pointing to a hefty downturn in house prices and activity in the market over the coming months whatever the soothing comments of the housing market economists from the leading banks and mortgage lenders. From a personal perspective, I am happy for property prices to decline for a couple of years having been out of the market for some little while. It probably won’t be a rout whatever the Daily Mail and Daily Express might suggest on their front pages. But the property boom is most definitely over for now and a dampening of the ardor for bricks and mortar as almost the sole route to greater wealth is, in my opinion, no bad thing at all.

PowerPoint Charts
House_Price_Inflation.ppt

A bubble waiting to be pricked

Roger Bootle has been a long standing critic of rampant asset price inflation. In the Business Telegraph he provides a caustic and hard-nosed look at the housing market recession.

“There are two major causative factors at work. First, houses have become extraordinarily expensive, to the point where ordinary people can barely afford a shoe box. And second, the ample supply of credit which allowed this to happen is now tightening. The second may be the proximate cause of the coming fall in prices. But don’t let anyone fool you into believing that it is the fundamental cause. That prize goes to the ludicrous over-inflation of prices. In order to get on the “ladder” you have either to own property already or mortgage yourself up to the eyeballs. This has been a bubble waiting to be pricked.”

The rest of his article which is excellent for students preparing for the housing market paper (AQA unit 3) this summer can be found here

Over at the Independent, the superb Stephen King looks at the credi crunch and market failure

From Pope Pius VII to the credit crunch, market failure lives on

Chart of the Day: Construction Sector Confidence

Last week we had lots of coverage and comment on the retreat from mortgage lending by many of the UK’s biggest home finance providers. The essence of the problem is that the lenders are just not as willing to offer loans to people as they were. Profit margins have been squeezed as the wholesale cost of money has risen, and some mortgage providers have effectively left the market for the time being. This is making life very difficult for people needing to get a first-time loan or looking to renew their mortgage deals when fixed rate agreements reach an end.

The result is a sharp fall in the number of property transactions that are falling through because of problems in finding the required level of funding.