Today in the UK, we are seeing somewhat of a perfectly imperfect cocktail when it comes to house prices. The kind that both tastes terrible and also gives you a nasty hangover the morning after.
That is, significantly higher interest rates than a year ago, recessionary fears and weak sentiment marketwide. Thus far, however, house prices have held relatively firm in the country, albeit with some weakness.
Property website Rightmove just reported that average asking prices were up only 0.2% over the month, compared to a 1.2% average gain at this time of year. Last year, asking prices rose 1.7% at this point (and it was a 3% rise the month prior).
But while this has slowed, it’s hardly dramatic – and house prices have still risen, even if it is a negligible amount. But will house prices dip further? Let’s dig in.
House prices are slowing more in real terms
The first point to make is this: a 0.7% rise is nice and all, but we are currently living in inflationary times, as any Brit on the streets will happily lament. In fact, inflation clocked in last month at 10.1%, the highest in western Europe.
This already paints the 0.7% rise in asking prices from last month in perspective – equating to 8.4% annually, it means prices are actually falling in real terms.
However, given the turmoil over the last year or so, an 8.4% gain is not to be sniffed at. 2022 was a horrid year for assets across the board. Stocks sold off aggressively for their worst returns since 2008. Unusually, the year brought bonds falling, too. The 10-year US government bond yield, the commonly accepted benchmark for long-term borrowing costs, jumped from 1.5% to 3.9% at the end of the year – the biggest jump in at least 60 years.
As for sentiment, I published a report looking into the yield curve last week. While the bonds I assessed are domiciled in the states, they provide a good viewpoint into the global outlook. Not only is the yield curve currently inverted, which is a much-feared recession signal, but it is the deepest level of inversion in 40 years.
Mortgage costs are squeezing house prices
No matter what way you swing it, possibly the most influential factor for house prices in interest rates. With interest rates increasing rapidly over the last year, house prices have come under pressure as mortgage payments have swelled.
In the latest UK House Price Index report, it was revealed that the average UK house price was £288,000 in February 2023, which is £5,000 lower than the peak in November 2022.
But in looking closer, that £288,000 figure is still 5.9% higher than the previous year, when the median price was £272,000.
More than anything, the figures thus far are showing a softening rather than a significant pullback. There are a few reasons for this. The first is the issue of demand and supply. In simple terms, the demand for homes outstrips the supply. This is an especially pernicious problem in big cities; for the UK, this means London.
There are plenty of ways to chart this, but I find the easiest is a simple comparison of the number of people compared to homes. I did this recently with the below chart and the US, but the same pattern can be seen in the UK (and many western countries). Populations have mushroomed but housing supplies have not followed .
People will always need a home to live in, and with the supply not holding up its end of the bargain, it does provide a nice cushion for prices. Having said that, prices can, and do, fall. The most glaring example of this is 2008.
2008 is not a fair comparison for housing
However, we must be careful in looking at the collapse of house prices in 2008 as a benchmark for today. This was a unique situation with poorly capitalised banks holding a bunch of overvalued assets (subprime mortgages).
Some may read that sentence and point towards the fallen Silicon Valley Bank and the banking wobbles over the last month, but that is not the same thing. This episode was brought about via steep interest rates, with a complete lack of risk management from SVB meaning they were exposed to ugly duration risk. The assets themselves – US government bonds – were fine, SVB just thought the free-interest-rate party would go on forever.
It’s also prudent to point out the change in the nature of mortgages in many countries, including the UK, since 2008. Many more mortgages are variable today than they were in 2008.
Again, this doesn’t mean that house prices are immune to interest rate rises. Of course they are very sensitive to rates. But the increased prevalence of variable mortgage does help at least mitigate the impact compared to what we would have seen in recent years.
It’s really rough out there in the UK. I wrote about this last October, and while things are a little less concerning today, it is still in a precarious spot economically. House prices are softening, and that is no surprise against this backdrop, with interest rates having risen so rapidly and a cost-of-living crisis engulfing the country.
However, fears of a full-blown housing crash seem misguided. There is plenty more to worry about elsewhere…
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