20th August 2012
Welcome to sun soaked Britain which has emerged from a couple of months of rain to a week of the sort of heat and sun that Brits usually have to go abroad to find. Unfortunately the UK economy is far from red-hot! Whilst the second estimate of UK GDP due on Friday is likely to contain a revision upwards it will not remove the number from negative territory. And as discussed below other worries remain.
The UK housing market
The supposed staple of dinner party conversation has not followed a pattern that you might expect in the credit crunch era. If we look back we see that five years ago things were as you might expect in a house price boom. In August 2007 Rightmove had recorded an annual price rise of 12.8% to £241,474 for the average UK house with its index being at 196.5.
Next we did see signs of an outright bust as Rightmove's average price index fell to 187 and then 181.4 in subsequent August's. However we then saw a rise taking us back up to 189 in August 2010 and an element of treading water since followed by a small rise such that as of this morning's update for August 2012 the index is at 192.2. So if we look at the total pattern we see that the economic shock which hit the UK due to the credit crunch did reduce house prices but that they are nearly back to where they began.
What are house prices doing now?
According to Rightmove we saw this in August:
"New sellers' drop asking prices by an average of 2.4%, the largest August fall Rightmove has ever recorded
This is the largest monthly fall Rightmove has ever recorded in the month of August and follows a fall of 1.7% in July."
So a turn in the market perhaps although a touch of care is needed as there are frequent price falls in August. There may have also been an effect from the Olympics although Rightmove seem to be displaying something of an asymmetry in the way that according to them it did not deter sellers but did deter buyers! However they are not especially optimistic for the post-Olympics period in the UK:
"With buyers distracted by sport and the economic backdrop, sellers will now have to compete hard to win their attention in the upcoming autumn selling season in order to move before Christmas."
There was one other feature in this report which was intriguing:
"All regions of the country recorded month-on month price falls for the first time since November 2011."
A possible end to the Central London property bubble?
Bubble alert: Central London property prices
The main report gives us prices for Greater London which averaged some £454,715 in August compared to a national average of £236,260 and £148,139 in the cheapest region the North (which is not the area you might think as the North-West and Yorkshire & Humberside are separate categories). And whilst Greater London may now be falling it is up 8.8% over the past year due to the property bubble at its centre.
We can look further into the detail and those who get vertigo from high property prices might like to sit down. The Royal Borough of Kensington and Chelsea had an average property price of £2,034,147 which was not only very high but rising as it was up 14.3% in the last 12 months. If we go back to August 2007 we see that the average price in Kensington and Chelsea was £1,449,385 in August 2007. So in one of the most difficult economic periods faced in the UK we see that in perhaps our wealthiest borough house prices have risen by 40%!
If we look for potential causes for this we cannot avoid the 1% versus the 99% debate although there are caveats to this. Firstly the 1% would not fit into Kensington and Chelsea. Secondly there has been over the past couple of years a flood of foreign money has poured into the Central London property market. Wealthy buyers have come from as far afield as China and Russia to add to those looking to escape economic difficulties in the more trouble parts of the Euro area. Cram all that into a limited geographical area and look what you get.
The UK Economy
One issue with the apparent recovery phase that the housing market had been going through is the performance of the economy. Far from the promises of economic growth which got as high as 3% at the time of the last election the UK economy has in fact gone nowhere.
One of the underlying features of affordability in a housing market is the level of wages and the level of real wages. Whilst wages have risen in the UK in nominal terms they have consistently fallen behind the rate of inflation. The latest update shows real wages falling at an annual rate of 1% and even this is an improvement on the trough in this which had real wages falling at around 3% as inflation pushed above 5% in September 2011.
So the stability of the housing market has not been supported by real wages over the past couple of years.
Mortgage lending is stable but weak
The Council of Mortgage Lenders has reported today for July:
"The Council of Mortgage Lenders estimates that gross mortgage lending in July increased to £12.7 billion. Lending rose by 8% from £11.7 billion in June and was 2% higher than the total of £12.5 billion in July 2011."
It is interesting that the CML thinks that this indicates see-saw activity in 2012 rather than using its natural bias to declare an outright improvement. One clear problem that we do have is knowing what the new normal should be. The peak in gross mortgage lending was back in 2007 when some £362 billion was advanced but that of course was the boom. Whereas from 2009 onwards we seem to have settled at around £140 billion.
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