Why U.K. Housing Is Still Over-Valued

Why is it that UK house prices have remained so expensive despite the gloom-and-doom circling the British economy about debt levels and rising unemployment?

Two historic factors are usually cited: a relative shortage of property in the UK due to under building for a generation; and the strong local mortgage industry that keeps pumping money into this asset class.

House price support

Therefore, the slashing of UK interest rates to record lows has been highly supportive of property prices, and even a small amount of new demand can not be accommodated by a market fundamentally short of houses. Hence UK house prices are only down 20 per cent in the past year.

However, this resilience in the face of extremely challenging economic circumstances can be seen as a weakness as well as a strength: markets that fall far and fast have a greater potential for recovery, those that hold up well may just stay over-valued for longer and still not avoid the final fall.

The problems of the UK economy are far from over. A decade of over borrowing – with much of the money going into rising house prices – has to be repaid. That means a contraction of domestic demand and rising unemployment.

The fear of unemployment is a significant factor is putting people off moving home, and actual unemployment makes it impossible to get a mortgage.

That would suggest that the recent very modest improvements noted in UK house prices in some areas are just a passing phase before another steep decline. The reason is not just rising unemployment and a poor economy, there is a real risk that historically low mortgage rates will not last much longer.

Bond markets

The UK government bond market is bound to come under pressure at some point and investors will demand a higher return on their money. Mortgage rates will go up and house prices will go down to compensate.

For low mortgage rates and high house prices are twins, but equally high mortgage rates and low house prices are also birds that go together. And while nobody in the British government would want higher interest rates this is where fiscal irresponsibility always leads, and you only have to look at mounting public debt to understand that national finances are out-of-control.

In this economic environment, UK house prices are just waiting for another fall.

Comments

[Davewmart:]

Good analysis. House prices in the UK seem to me to be in a 'waiting for the next shoe to drop' mode.
You do omit a further factor holding up UK house prices relative to the US though.
There is no such thing as a non-recourse mortgage in the UK, so as long as the cash can be raised to pay the mortgage one way or another, people are likely to do so.

Jul 19 09:32 AM

[johnbee:]

Lets hope Peter can forecast the UK housing market better than his Gold market pronosis.

Jul 20 12:55 PM

[Peter Cooper:]

Has holding gold been an error? It has been a great way to sleep at night during the financial crisis - and the real upside is still to come! That I am afraid to say can not be said about UK housing.

Jul 30 06:45 AM