UK House Prices - 2011 and Beyond

In 2007 we saw the images of Northern Rock customers queuing on the streets to withdraw their funds. It seemed that finally the exuberance in the housing market was going to be deflated. Three years on and this has not happened to any really significant extent. Up until recently, I have been waiting for the monthly data from various sources to show an accelerating rate of falls. In reality, the market has traded sideways at a level just below the all time peak. When markets do not do what you expect them to you eventually have to ask why.

Life Before and After Northern Rock

Prior to Northern Rock, the housing market appeared on the face of it similar to any other. Ultimately, one believed it was driven by the invisible hand of market forces. Clearly the explosion of credit was propelling it forward but supply/demand fundamentals still appeared at the fore. The reality of the market has become apparent post Northern Rock - the house market is subsidised by the UK taxpayer.

If Northern Rock and HBOS had been allowed to go to the wall, then a drastic correction would have occurred in house prices. Instead, the taxpayer came to the rescue and has been putting in scaffolding under a fragile market ever since. Approximately 70% of households are owner occupied so there are political and economic reasons why this is the case.

Economy and Consumer Penalised

Ultimately, it is bad for the British public. In the long run, high house prices benefit very few. Non-owners and owners are now being taxed to support the value of their house.

This can not be good for the economy but policy is now backed into a corner by housing data. Even though the market is viewed as over-valued, any significant falls towards a healthy level are apparently unthinkable. A depressed housing market will be used as good reason for further QE.

2011 and Beyond

This has profound implications for the next few years. I believe the market will feel a heavy hand on its head as consumers struggle with job losses, rising food/petrol prices etc resulting a downward grind by a few percentage points, probably between 5% and 10% over 2011. Beyond this, the data will probably not get much worse. If it does, the BOE will be quick to inject liquidity and rubber hammer banks into lending when they shouldn't. If this is correct then a bear like myself has to consider becoming neutral or marginally bullish. If nominal price falls are unlikely, the yield of 4-10% on residential property looks attractive compared to most other investments even without the tax benefits. The biggest risk is if the BOE loses control of interest rates due to lack of faith in its debt and currency. However, if there is a currency crisis then property will be better than cash or gilts.

Conclusion

The market should have been allowed to correct itself. Instead resources continue to be wrongly allocated into supporting over-valued housing stock. Buy-to-let entrepreneurs return in droves when they could expend their energies and cash in other enterprises that might generate jobs. However, if you are a UK resident there is a new reason to owning a house - to capture the subsidy the tax payer is providing.