One of the features of the credit crunch has been that more than a few countries have seen busts in their housing markets follow booms. In places like Spain and Ireland these have been severe busts and of course substantial house price falls were seen in parts of America such as Florida. The International Monetary Fund which suddenly seems to have housing issues on its mind has weighed in on this issue.
In fact, our research indicates that boom-bust patterns in house prices preceded more than two-thirds of the recent 50 systemic banking crises.
If you stare hard at their global property index chart you see that the rally began as the clock ticked us into 2012. So it is interesting to see that the IMF is worried this time after only two years of house price rises! What was that about stable doors and horses?
An issue for the Bank of England
The Bank of England has been trumpeting the line that macroprudential policies are the way to deal with a house price boom in the UK. However the IMF intriguingly seems much less sure about this.
the policy toolkit to manage housing cycles is still under construction.
It does get more positive later but I note the use of short-run. What about the medium-term or even the long run?
Though evidence thus far suggests that macroprudential policies are effective in the short-run in cooling off housing markets, it is clear that honing them remains a work-in-progress.
The tools for containing housing booms are still being developed. The evidence on their effectiveness is only just starting to accumulate.
This rather contrasts with the bullishness of the Bank of England on this subject. Of course its attitude had the problem that there are times back in the UK’s economic history that such measures have been tried. The fact that they were then abandoned gives one a rather eloquent clue as to their effectiveness.
Vince Cable intervenes
The UK Business minister was interviewed on this subject on the Radio 4 Today program and if we move away from political bluster he did offer his opinions on house prices and particularly earnings to ratios.
Between 3 times and 3.5 times is stable
This was much more revealing than he intended it to be! Let me explain why by telling you that the Halifax Building Society calculated it as being 4.8 in the first quarter of this year. They also go to trouble to get a favourable number (using full-time male employee earnings for example). If the Business minister wishes to look for an affordable house then only Scotland at a ratio of 3.3 is available to him. An interesting intervention in the Scottish independence debate? Even a place he described correctly as having had substantial price falls (Northern Ireland) is on average too expensive at 3.6. So we end up with a -presumably unintended- critique of present government policy. Those of you who recall the Royal Mail share issue debacle may be thinking that Vince Cable is building a track record of underpricing things! Oh and I dread to think what the earnings to house price ratio is in leafy Twickenham which is Vince’s home constituency.
Also Vince Cable treated us to this opinion.
Clearly the solution is to build a lot more houses
Of course a lot more houses have to be built
How did that work out for Ireland and Spain? Last time I checked they had given this as good a go as they could.
Back to the IMF
As it scours the globe the IMF reminds us that Canada leads the table of house prices to rents as it is 86.8% overvalued. At least we do not have to go far to find the central bank governor who presided over this as Mark Carney will be found tonight at Mansion House for the setpiece speech. This is of course a somewhat troubling precedent to say the least. Presently the UK is at a relatively lowly 38% overvalued so there is plenty of scope to work the same trick again!
If we look at earnings to house price ratios Canada only gets a silver medal as Belgium pushes it out of the way being 49.5% overvalued compared to its historical average. The UK cruises in at a relatively lowly 27.8% which intriguingly means that we are pipped by France at 28.6%. Of course there are plainly issues using historical averages after a boom so we face the prospect that such numbers will be an understatement. Also I am reminded of the problems of macroprudential management when this happens.
One example of this is Belgium, where the IMF concluded that despite the high valuation ratios, risks of a sharp correction of real estate prices appear contained.
So you establish a set of criteria then when it is exceeded you ignore it! How does that usually end?
I have to confess that I thought the likeliest source of excitement from Belgium was going to be from its crop of young and skilful players in the world cup.
Back in the UK
Today’s data from the Council of Mortgage Lenders updates us on the state of play.
In total, 53,200 loans were advanced for house purchase, up 6% compared to March, and the value of these loans totalled £8.8bn, a rise of 11% on March…….Compared to April 2013, the number of loans increased by 33% and the value of lending by 47%.
So the figures remain pretty strong but there was something which caught my eye.
The typical loan size for first-time buyers was £121,500 in April, up from £118,750 in March and represents the highest monthly average advance for first-time buyers on record.
So as we learnt only yesterday that according to the official statistics wages are barely rising and indeed falling in real terms that tells us all we need to know about affordability? Er perhaps not….
In parallel to this, the typical income of a first-time buyer household increased to £37,000, up from £35,704 in March, which was also the highest average income on record.
Apparently income rose by 3.6% in April which contrasts quite a bit with the official numbers to say the least. You may note how they have switched from individual to household and also from earnings to income which will be a relief for Vince Cable’s ratios but via the moving the goal posts route. There is also a diference between weekly earnings and overall income but that is quite a gap in perspective to say the least! Perhaps first time buyers are experiencing a boom we have never seen the like of before…
Are matters cooling?
The RICS has advanced this view today which of course is nicely timed for the Mansion House speech. From the BBC
What we are really seeing is some of the very strong upward momentum starting to come off the housing market, as a lack of supply, higher prices, more prudent lending measures and some of the talk from the Bank of England are creating a level of caution among sellers and buyers.
This does however chime with this from the Black Bricks consultancy.
In recent weeks we have seen the first clear evidence of a broader cooling in the prime Central London property market for some years, with price reductions for homes above £2m across prime Central London.
There is much to consider here but let me open with a very broad sweep. How can house prices rise when wages especially real wages are struggling in so many places? If we look at the IMF data there was a worldwide surge in house prices in the preceding decade to this and we know that wage growth especially real wage growth has fallen over time. This seems to be particularly true in the UK right now if the official numbers are even half-way accurate. The factor which to coin a phrase has squared this particular circle is that interest-rates and bond yields have been falling over a perspective of years and decades. If this is to carry on we arrive at one of my themes which is that there is pressure from this route for others to follow the ECB on the road to negative interest-rates or as Talking Heads put it.
They can tell you what to do
But they’ll make a fool of you
And it’s all right, baby, it’s all right
We’re on a road to nowhere
We will find out more about negative interest-rates today as they began yesterday.Meanwhile on a lighter note I was reminded of this from JK Galbraith earlier.
The only function of economic forecasting is to make astrology look respectable.
Is World Cup forecasting more or less respectable than economic forecasting?