Is a Housing Crisis on the cards?

9th November 2011

"A recession is ordinarily followed by a cut in official short-term interest-rates which stimulates mortgage demand and thereby stimulates the housing market," says Mindful Money's economist Shaun Richards on his blog. "More activity in the housing market then helps to boost the economy, which then helps to improve the housing market and hopefully so on…"

But what state is the market really in?

The typical surveys have been trotted out by the media in recent weeks giving us varying perspectives. The Royal Institute of Chartered Surveyors (RICs) tell us that there is there is little improvement in the housing market. The gauge by London-based RICS fell to minus 24 from minus 23 in September.

However, RICS's index of sales rose to 8 in October from minus 3 in September. Some respondents to the survey "attributed this to growing realism from many sellers, who now appear to more willing to take offers in order to secure a sale," RICS said.

Halifax said the U.K. property market is a "mixed picture" as it reported an increase in values based on its gauge in October. It says house prices rose 1.2% in October, but on a quarterly basis house prices were 0.3% lower in the three months to October than in the previous three months, reports Citywire.

Meanwhile, This is Money reports that Nationwide said in its October survey:  'House price growth is likely to remain soft in the period ahead, with prices moving sideways or drifting modestly lower over the next 12 months.'

Painting a far more dismal picture is economist and investment manager David Kauders, adds the report, who has suggested that this is actually the start of 'a slow-motion crash – so slow that many commentators will not even see it. They will observe only the shorter-term trends.'

Certainly many remain sceptical of reports on house price moves. For example, DebtFree2011 says on the House Price Crash forum: "The UK's obsession with house prices is too entrenched …. that's why the House Price Indices are adjusted to boost sentiment. There are too many vested interests in the media … you can't believe a word they say."

Meanwhile, 50sQuiff says: "I believe there's a good chance of some good nominal falls in housing ahead, although I don't believe in a broad-based deflation. After all, we don't have free markets or a stable numeraire for a given price forecast."

Headwinds facing the market

There is little doubt that there are huge potential stumbling blocks for the property market, whateve the forecasts. Just a few of these include the interest-only mortgage crackdown, lenders facing the mortgage crunch, austerity measures and the Eurozone crisis.

…and the market is in worse shape than it may appear

Inflation means house prices have dropped far more significantly, stress economists.

Shaun Richards says on his blog: "As the official level of Consumer Price Inflation is 5.2% and Retail Price Inflation is 5.6% then we can see that there has been a much more substantial fall in house prices in real terms. The Halifax annual fall becomes 7% or 7.4% in real terms depending on which of these indices that you choose to use. As CPI ignores the housing market it is probably more logical in my view to use RPI."

He concludes: "…The Central London property bubble has masked to some extent falls elsewhere and the fact that consumer inflation has gone above 5% means that in real terms prices have fallen more heavily than in nominal terms."

But what do commenters have to say?

There are many issues picked up by commenters on the blog. These include restricted supply, the impact of buy-to-let, and the situation for first-time buyers.

Here is a selection of their thoughts on where the housing market stands today:

Drf disagrees that UK property is highly priced due to restricted supply, commenting that there are many other factors at work, and this is too simplistic a view: "The establishment has contrived not only to limit new building and any form of building extension in the UK, but also to ensure that almost all of what is built is only over-congested new buildings with ridiculously excessive occupation density (i.e. with as little land as possible). In many cases the developers have been permitted to demolish existing houses and to build as many as 20 houses on the previous plot where there was one. Corruption has been a key part of this process to also ensure that only particular mass developers were permitted to build grossly over-density developments.  In no other EU state would nor has this been allowed."

Zak adds: ""Restricted supply", particularly at the cheaper first-time-buyer end of the market is not all down to planning restrictions. The rise in Buy-To-Let "investment" mortgages has played a large part in limiting the available property available to those starting out on the property ladder. However, it would appear that nobody sees any lessons are to be learned from the property price bubble, so I fully expect to see a return of the Buy-To-Let brigade just as soon as banks start to of
fer the finance again."

What about buy-to-let investors?

"Personally, having read the article, I hope the bottom drops out of the market and the "buy-to-lets" lose absolutely everything they ever owned. I can think of nothing worse than leeching off other people's misfortune in this way. This part of the market is in dire need of regulation and/or additional taxation," says Zak.

What will happen when rates rise?

JW says: "Shaun, presumably when the BoE finally increases interest rates when it has done what it can to give commercial banks fee money and inflate away some of the UK debt, the pips will squeak in the housing market, prices will plunge and the majority of the reduction on personal wealth will take place. Not like 'ordinary recessions' at all."

So is a housing crisis set to erupt?

Shireblogger believes this may occur. He says: "Thank you Shaun and contributors. I read recently that of 337 English planning authorities only 39% in 2010 had conclusions on a five year land supply for new housing (social and commercial) on developable sites. Housing needs surveys (social and commercial) show an unsatisfied need arising from various factors such as the creation of differing family units. Regardless of availability of liquid finance, isnt there a housing crisis/supply problem waiting to erupt. The credit crunch is just aggravating an existing problem and inflating rents…"

More from Mindful Money:

House Price Crash: Wisdom of Crowds or Digital Maoism?

Property: Should you invest in student digs?

Are the days of couples buying their first home in their early 20s all but over?

Leasehold: What investors need to know

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