On UK house prices and autumn downshifting
Anthony Peters still calls for BoE tightening in November.
I might have been somewhat surprised by the conciliatory tone struck by the Bank of England as it published its Quarterly Inflation Report but that was nothing compared to the release overnight of the Royal Institute of Chartered Surveyors’ Housing Market Survey, known as the RICS index, a monthly report which simply gauges whether its members see prices overall rising or falling. At 49%, this diffusion index indicates that the grand run in UK house prices might finally be running out of steam. Not that this is a bad thing.
UK residential property, especially that in London, has been on fire and it is no secret that, to the British, home ownership, and hence the value of their house, is the single most important driver of consumer confidence. However, there is also a cultural quirk in that Britons regard the highest price the property might have achieved, had it been for sale, to be the benchmark of all things. It is not in the nature of the beast to regard prices quoted during bubbles to be outliers and thus, until the next bubble has been inflated, nobody seems happy.
Five or six years ago we all seem to have been content to admit that we had been in a headless, debt-fuelled hiatus and that the growth trajectory this brought with it was artificial and, to be honest, rather embarrassing. Memories are short and although six years have passed since the bubble burst there remains an obsession with surpassing all chart points hit at the top of the bubble.
Thus, the Englishman whose house is his castle, apparently feels bereft and impoverished if his home is worth less than it might once have been, irrespective of how long he has owned it and at what price it was acquired. We are all used to the conversation which begins with “…at the peak my house was worth X…”. Who cares? You either mark to market or you don’t. The principle of marking at the lower cost or market is, of course, the accepted alternative to mark to market, but Kevin SixPack seems obsessed with clinging to the process of crystallising at the highest valuation ever seen.
The Bank of England has made it clear that it wants to bring some grown-up thinking into the British residential property market, but as I was taught in early days in the business, it is a futile exercise trying to take a rational approach to an irrational market. UK housing seems to have only two gears, namely top and reverse. The Bank is desperately digging around trying to see if there is anything else in the gearbox which hasn’t been used yet.
My reading of the Inflation Report is that we might not exactly like what we have but it has to be a darned site better than the alternative.
Please don’t get me wrong. This economy really does look like it has achieved un-stick speed and that it has a enterer a self-sustaining pattern of growth which is something not many economies can claim of themselves, maybe not even that of the USA. However, the fly in the ointment remains house price inflation which has consistently out-stripped earnings growth by multiples. Hence, again no PhD needed, the balance has to be made up by increasing debt levels.
I’m getting rather fed up with the moaning that banks aren’t lending. They must be or we would not be seeing 3.1% GDP growth. That there were swathes of the economy which were, pre-crash, entirely debt funded might have been forgotten. Small businesses were going under left, right and centre but many of those had only a wafer-thin equity base and balance sheets were leveraged to levels which not only looked irresponsible but which proved to be so when stressed for the first time. High streets are not deserted entirely because there are too few shops trading but maybe because there are too many retail properties.
The government did a reasonably decent job of managing the shrinking economy through the dark years from 2008 to 2011 but it must now cautiously manage expectations. The Bank is doing its part; now it is the turn of Downing Street.Fact is that there is an election in May next year and expectations management wins no votes. Thus I repeat my call that the first tightening move should be in November of this year; it will always be easier to adjust policy again if needed than to try to shut the barn door after the horse has bolted. 3.1% GDP growth and 0.5% interest rates don’t belong in the same economy, irrespective what house prices are doing.