Building A Pause In UK House Price Gains

It is often said that hindsight is a wonderful thing. We now know that the developed world, particularly the US and the UK, saw a housing and debt bubble that promptly popped and started the Global Financial Crisis. Spotting bubbles is not a difficult thing of course. It is the spotting of when those bubbles are going to pop that is the inexact science. On such beliefs and expectations investments are made, reputations are built and can be lost.

The UK housing market has seen prices increase on average for the past four years. It has been the past 18 months however, when the dinner party conversation has promptly switched back to loan-to-value ratios, damp-proofing, the newest hot areas and how much a survey should actually cost. The housing market was back.

The cycle is already starting to change, however. Charles Dow, founder of the WSJ, had this to say about conditions and their predilection to change: “There is always a disposition in people’s minds to think that existing conditions will be permanent. When the market is down and dull, it is hard to make people believe that this is the prelude to a period of activity and advance. When prices are up and the country is prosperous, it is always said that while preceding booms have not lasted, there are circumstances connected with this one which make it unlike its predecessors and give assurance of permanency. The one fact pertaining to all conditions is that they will change.”

Last month, the Nationwide Building Society, the UK’s largest building society and one of the largest mortgage lenders, saw house prices fall for the first time in 17 months. A 0.2% fall in prices represents around a £1,000 decline in the value of the average £189,306 property. This is not the end of the world but suggests that some of the madness that was seen in housing has started to recede.

Falls in prices are natural as demand slows. Simple supply and demand dictates that price levels dictate the level of supply and demand. As price increases, demand falls off until nobody will pay that amount. Prices have to dip to pick-up demand. Have UK house prices already reached their peak therefore?

Over the weekend, the Centre for Economic and Business Research became the first real policy shop to publish its expectations of the property market into 2015 this weekend. The CEBR has said that it expects prices to fall by 0.8% through 2015 following a near 8% expansion in 2014. The reasons why are more demand side than supply side, of course.

Tougher mortgage eligibility criteria and high deposit requirements have been part of the lending landscape for six months or so. Once the loan is obtained, however, base rate concerns become obvious. Despite every Bank of England official out there saying that rates rises will only be “limited and gradual”, fears that the hiking cycle will run higher and faster than markets currently expect – base rates at around 2.5% in two years’ time – have got buyers doubting their commitment levels to that pad in the suburbs. Unless we believe that pay levels are going to start increasing in real terms anytime soon then that situation is unlikely to reverse.

Upwards pressure on UK property prices from foreign investors will continue especially if sterling falls that make UK property cheaper in currency terms continue. Unfortunately, UK property may be looking a little less like a haven asset ahead of the election in 2015 and following the continual governance issues that the all-to-close Scottish referendum brought up. Tax issues, such as a possible Mansion Tax, although ill thought out at the moment, remains a definite possibility in the long term I believe.

Two years ago, property in the UK – especially in London – was seen as a no-brainer. Its value would head up as sure as the sun rises in the East. We could be seeing that confidence start to dwindle.