In the inaugural blog post (to be one of many) I shall cover how house prices have changed over time in the United Kingdom. The blog post will compare the recent house price cycle to previous cycles. The comparison will look at the steepness and speed of recovery/fall in house prices relative to the late 1980’s price fall.
Chart 1 Nationwide Nominal House Price
Chart 2 Nationwide Real House Price Index
The 2 charts above shows UK house price cycle both nominal and real prices. Chart 2, shows real house prices and highlights 3 cycles, one mini cycle and 2 big cycles. Concluding with current cycle, which began in early 1996 and ended in Q3 2007,. However, chart 1, nominal prices shows 2 major cycles. The difference in charts 1 and chart 2 illustrates the impact of high inflationary periods on house prices. Comparing the real to nominal prices in the cycle that started in (peak) Q3 ‘89 to (trough) in Q4 ‘95 examplifies the impact of inflation on price cyles. The correction was long and protracted:-lasted close 26 qtrs (6.5 years); prices fell by 37.2% in real terms. In nominal terms the same cycle bottomed much earlier, in early 1993 reaching a low of £50,128. Prices showed slight improvement from the Q1 ‘93 bottom and reached £52,144 in Q4’94 (increase of approx 4%). Despite prices falling back close to 51K in Q4 ’95, in nominal terms, the Q1 ’93 low was not retested. Interestingly, real house prices followed a similar pattern, but the low reached in late Q1 ’94 (£78,595), was retested in Q4 ’95 (low of £74, 208). The table shows the decline in the late 1989 downturn and the late 2007.
Table 1 Price Peak to Trough
(Calculated using Nationwide House price index)
So far the current cycle has not declined to the extent as the 1989 to 1993. Chart 3 below reports the monthly decline in house prices. The chart shows the speed of decline in the current cycle relative the previous cycle the peaked in late 1989. The base date of 100 is set at the peak of each cycle. The house price index used is the Halifax monthly house price index.
Chart 3 Lloyds-Halifax House Price Index (base 100 = cycle peak)
The current house price cycle has taken a V-shaped recovery, while the earlier cycle was u-shaped. This in my opinion, can be attributed to the high interests in the early 1990s set to maintain the GBP within the European exchange rate mechanism. However, in the latest cycle the Bank of England cut interest rates to on all time low; helping provide support for house prices. Lower mortgage rates (specifically standard variable rates) have enabled home-owners to service their mortgage. Consequently, this resulted fewer properties being put up for sale given the economic backdrop. A future blog will discuss the relationship between interest rates and house prices.
Direction of House Prices
This leads us to consider the future direction of house prices. Chart 4 highlights the annual change in house prices, using the Llyods-Halifax monthly house price index.
Chart 4 Annual % Change in Lloyds-Halifax House Price Index
Chart 5 Annualised Q-o-Q % Change in Lloyds-Halifax House Price Index
The annual change in house prices still shows that house price growth has an upward direction. However, if changes in house prices are assessed using a near term measure (annualised quoter on quoter change), the prospect for continued house price growth is dimmer. See chart 5 above.
Chart 6 Lloyd-Halifax House Price Annual % Change
Chart 7 Lloyds-Halifax House Price Index Monthly % Change
Chart 7 shows the monthly percentage change in the Lloyds Halifax house price index since April 2009 cycle bottom. From mid-2009 house price growth shows strong momentum, but has weakened in early 2010. Anecdotal evidence suggests that the increase in house prices since April 2009 has enticed homeowners to increase the number new sales instructions (sale and inventory relationship is to be address in a future post). Furthermore, after April 2010, the base effect will have a negative impact on the annual growth in the house price indices. Since prices began to rise after April 2009, house price annual change will face higher 2009 comparisons.
Upcoming Challenges for UK House Price
I am sure everybody out there expected a hung parliament. No surprise there. However, how does this impact house price.
The most important issue will be how the coalition government (most likely a ConLib government) address the housing supply.
Second, whether the ConLib government will continue to prop up first time buyers. And also how they plan to treat capital gains tax on second homes. High CGT could encourage/force property investors to sale the their properties in order to lock in capit gains before the tax rise.
Third, issue to consider is that of government debt. High debt to GDP ratio has to be addressed. High debt can lead to rising interest rates as pound is loses value versus major trading partners.
Finally, what will be the attitude of the ConLib administration towards financial service industry? More regulation can lead to reduction in lending levels and less competition. However, if banks are broken-up, this can lead to increased competition and increase in bank lending.
Future Topic: Interest rates, Inflation and house prices.
I hope to hear from other economic pundits views on the any of the topics addressed in my first post. I am quite open to robust dialog. Seriously, let us exchange ideas.