Estate Agent Boards Outside Houses

A report out this week predicted that average house prices will rise to £272,000 by 2021, and has drawn some pretty hyperbolic headlines in the process, but there is danger that we are sleepwalking to disaster.

The Forecasts

Actually, for all the headlines, for example the Express led with a headline about house prices being set to soar, yesterday, the forecast from CEBR was not that bullish at all.

It has predicted an increase in house prices of 4.4 per cent this year, 4.1 per cent next, 5.7 per cent in 2019, 6.0 per cent in 2020 and 6.1 per cent in 2021.

If you look at the FTSE 100, from the day it was founded in 1984, and look at average return – net of yield – to today, then it saw a much stronger performance than that.

The big rises occurred in the years 2014 to 2016.

Or put it another way, in 2010 the average house price in the UK was £169,000, right now it is £220,000 and it is forecast to rise to £272,000 in 2021.

The UK picture

There is a puzzle. It seems likely that, for the next 18 months to two years, inflation will grow faster than wages. Indeed, next week we may well get data on average wages to confirm that the decline in real wages began in February.

This happened earlier this decade, from 2010 to 2014. And for most of this period, house price growth was muted, at best – falling 1.5 per cent in 2011, and rising by just 0.4 per cent in 2012. Although things began to change in 2013, as the gap between inflation and wage increases narrowed.

But this was also a period which saw record low interest rates.

No one knows for sure when UK interest rates will rise, but there are many who expect this to happen later this year, and again in 2018.

So, let’s run that one past you again: rates are likely to rise while real wages are expected to fall.

Does that strike you as a benign set of circumstances for the housing market?

The reality is that demand for housing is low, but supply is even lower. That is why UK house prices have been creeping up, it is surely less likely this will continue for the next 18 months.

For that matter, the Nationwide recorded a fall in house prices in March, while the Halifax index recorded a drop in February.

Next week we will get the latest Residential Market Survey from RICS, this will tell us more. Of late the index has been pointing to modest rises.

The International picture

But, as we learned in 2008, what happens abroad matters. House prices across the developed world tend to rise in tandem.

And that brings us to the first big problem.

Let’s start with Sydney. Right now, in the city, average house prices to median income stands at a ratio of around 12. Only in Hong Kong, Beijing and Shanghai is the ratio higher. But then the ratio is also exceptionally high in Vancouver and Auckland.

In fact, there have been warnings of a property bubble Down Under and in Canada for some time.

House prices have risen by 20 per cent in the last 12 months in Sydney. In Melbourne, they were up 17.15 per cent.

This at a time when credit ratings agency Moody’s has warned that a rapidly growing number of borrowers in Australia have fallen behind on mortgages.

As for Canada, the boss of the Royal Bank of Canada, Dave McKay recently said that he thought the market was at the ‘point of strain. ‘

But then, a report out at the end of last year, from UBS, highlighted Stockholm and London as places where house prices look precariously high.

We already know about London of course, and there have been signs of the market cooling in the city of late.

But the boom in Swedish house prices is less well known – all the same, it’s a problem in the making.

If you also take into account how household debt levels have been rapidly rising across much of the developed world. It is especially elevated – listed in order or size – in Denmark, the Netherlands, Norway, Australia, Switzerland Ireland, Sweden and Canada.

It’s the combination of elevated house prices, rising household debt to GDP, that raises concern.

Add to that the possibility of interest rates going up.

Look further forward

But it is demographics that pose the biggest cause for alarm.

Populations are set to fall, or are already falling across much of Europe. Within a few years there will be a massive problem of empty houses, new ghost towns bereft of people in Germany and Italy, for example.

There will remain a shortage of homes in the UK for some time – although even in Britain there is a question mark over what will happen when the baby boomers retire, and if they choose to downsize en masse, freeing up huge capacity.

But we live in an interconnected world. What happens in Sydney and Stockholm affects what happens in the UK.

This is true, even in the Brexit Britain.

There is way too much complacency.