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According to the Council of Mortgage Lenders, gross mortgage lending in May increased to its highest monthly level since October 2008. The signs are unmistakable. Right now there are forces at play pushing up UK house prices. Now we enter a new, post QE era, what does that mean for house prices? Are they vulnerable? Look beyond the UK’s borders and housing markets in certain other countries look even more precarious.


The Council of Mortgage Lenders estimates that total gross mortgage lending in May increased to £14.7 billion, representing a rise of 21 per cent from £12.2 billion in April and 17 per cent higher than the total of £12.6 billion in May 2012. This is the highest monthly estimate for gross mortgage lending since October 2008. Its chief economist Bob Pannell said: “Funding conditions, helped by the funding for lending scheme, continue to look favourable and are supporting more competitive mortgage pricing and availability and a gradual resumption of lenders’ risk appetite.”

Housing market surveys from the Nationwide, Hometrack and Halifax have all been showing month on month rises in house prices for several months now. The RICS residential housing market survey, which I happen to rate very highly, went positive in April – the first positive reading since June 2010 – and then rose in May.

This has happened at a time when growth in average wages lag way below inflation. In other words, house prices have been rising despite households being worse off.

There is more than one explanation, but clearly the catalyst for recent rises has been the government’s own efforts to kick life into the market. I think, however, a deeper force is at work too. I think that there is something in the British psyche; something that is now very firmly etched, that is pre-disposed to expecting housing prices to rise. The UK public are terrified of being left off the ladder – of falling too far behind, and this makes the UK market always susceptible to rises above levels that are warranted.

I continue to think that this attitude, this faith in housing, is dangerous.

The Ernst and Young ITEM Club recently forecast that mortgage costs will rise by 15.6 per cent in 2015 and by 23.4 per cent in 2016. See: Ernst & Young ITEM Club special report on inflation 

The Building Society Association recently stated: “One serious risk factor of the Government’s strategy …is the potential for the inadvertent creation of a future house price bubble. For the Help to Buy: mortgage guarantee scheme in particular, it is critical that the Government designs and manages this scheme effectively, with a clear exit strategy right from the start if the clear market risk from state and ultimately tax-payer intervention is to be avoided.”

But it was OECD data that got me thinking. According to the OECD, UK house prices to income are 22 per cent above the UK average since 1980, and UK house prices to rent are 31 per cent above average.

On the other hand, the same OECD report has Canadian, Belgian, Norwegian and New Zealand prices even more overvalued, to each countries respective average since 1980. For France, Sweden and Australian the extent of the apparent overvaluation is similar to the UK’s. See page 24 of this report:  

In Spain, on the other hand, house prices still seem too high, but only by a small margin. In the US, Portugal and Ireland they look quite cheap – but then again they have looked cheap for nigh on two decades in Japan.

Comparing prices to rent and income is not the only way of considering whether houses are overpriced, but it is certainly a guide.

The markets have concluded that as QE comes to an end as and interest rates rise, (this week Ben Bernanke hinted that US rates will increase in 2015) equities, bonds and, in particular, emerging market debt will be the victims. In the short run, maybe even medium term, this may well prove right. But in the longer term, emerging market fundamentals especially for the second tier – that’s the level after the BRICS – still look strong. As for equities in the developed world, especially the US, I find it hard to believe they will fall for an extended time frame when the reason for QE being reined back is that the economy is improving. But house prices in the UK and in some of the other countries I mention here look very vulnerable to me.

 

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees


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