House Prices Won't Rescue The British Economy

In my Money Week column this week, I've been looking at house prices, and why they won't dig the British economy out of the hole it is in. Here's a taster....

Estate agents have a glint in their eyes again, the property sections are back in business, and even mortgage lending is picking itself up from the floor. The worst of the housing crash appears to be over.
And it is not just in Britain. The far larger, and far more important, US housing market has crawled out of the intensive care ward as well.
But does that mean the economy is about to recover as well?
Since it was the collapse in property prices around the world that plunged the financial system into chaos, and started the recession, it might seem reasonable to suppose that it will. The stock market certainly seems to think so. Every time the house price indexes tick up another point, equities rally on the news.
It’s reasonable, but wrong.
In truth, the property market isn’t going to be able to re-boot the global economy. It may have led the last boom upwards, but it won’t lead the next one. There is too much supply on the market, too little fresh demand, too many burnt fingers, and too little cheap financing available. Whatever leads the next boom, it won’t be property.
Still, that doesn’t mean the signs of recovery aren’t real.
Last week, the Nationwide Building Society reported that British house prices rose for the fifth month in a row. This week, Halifax reported a 1.6% monthly rise. Prices are now back to the same level they were a year ago, at the same time that the collapse of Lehman Brothers triggered a global panic. They aren’t quite back to their peak, but they aren’t too far off it.
Mortgage lending is steadily picking up, and, even if volumes are thin, properties are shifting. It may be a while before the TV schedules are packed out again with shows on how to make a quick million from tarting up a semi in Wrexham, but the market looks a lot healthier than it did six months ago. By historical standards, 2008/9 was not so much as crash as a slight correction.
Much the same is true in the US. American house prices notched up their biggest monthly gain in four year in July. They rose 1.6%, the third consecutive monthly rise. Of the 20 largest US cities, 18 reported price rises. With prices a third off their 2006 peak, it will take a long time to recover all the losses. Even so, the trend clearly looks to be upwards.
Of course, we can question how durable that recovery will prove. Interest rates remain exceptionally low. With base rates at less than 1%, most people can afford to at least pay the interest on their mortgage. When rates start getting back to normal, as they surely must at some point, then monthly mortgage bills will soar. A lot more people will be repossessed, pushing more properties onto the market at fire sale prices.
And, of course, we may well be only half way through a double-dip recession. There could well be plenty of economic pain ahead. None of that will be good for the housing market.
The more interesting question, however, is whether hosing markets can kick-start the global economy.
It will help.
The banking system is critically dependent on property prices. A property – either commercial or residential - is the collateral for most loans. As prices recover, the banking system will start to look a lot healthier, and that will strengthen the economy.
Consumers will be feeling more confident as well. As their houses are worth more, and particularly if they claw their way of negative equity, they will start spending more. There may not be a recovery in mortgage equity withdrawal. But there will be a tick-up in sentiment.
That said, it would be a big mistake to expect a house price recovery to spark another boom.
First, there is too much supply on the market. The decade-long bubble in property prices led to construction booms in the US, Spain, Ireland and to a lesser extent the UK. The Spanish coast is cluttered with new apartments and villas. Old industrial cities like Leeds and Newcastle are full of smart new blocks of flats, most of them empty. It will take a long time to clear all that surplus stock – and until that happens, prices aren’t going to rise much further.
There won’t be much fresh demand either. A big part of the housing boom was demographic change. As populations rose, and waves of immigrants moved into booming countries, demand soared. But in the next couple of decades, those trends go into reverse. Low birth rates mean static or falling populations. And migrants are not going to be moving to countries where stagnant economies are not creating many new jobs.
The financing isn’t going to be available either. Over the last decade, mortgage lenders gradually loosened their criteria for handing out loans. They decided not to worry too much about whether you had a job, or a deposit, or indeed showed much inclination to pay off your debts. Some of that was justified – there was never much point in excluding the self-employed from the mortgage market, for example. But it went too far. And it’s going to be a long-time before the 125%-self-cert loan is back on the market.
Lastly, there are too many burnt fingers. True, bankers and investors have notoriously short memories. But not that short. The bankers aren’t going to pile into mortgage lending again in a hurry. And home-owners will go back to thinking about their homes as a place to live, rather than an extension of their bank account. As a rough rule of thumb, it takes the financial markets about 20 years to forget everything – so it will be 2030 before we’ve erased all memory of the credit crunch, and the housing bubble that led into it.
The global economy will start booming again at some point. It always does. But it won’t be the housing market that re-boots it. And there is no point in looking at those indexes for signs of a global recovery.