Although the last 3 to 4 months has brought some great news for London house prices, every piece of positive news has been met with predictions that the rises are unsustainable. Like scratched records, commentators massage negative sentiment, pointing to a weak underlying economy, rapidly rising inflation resulting in higher borrowing costs; big redundancies in the public sector; the election; and big tax increases. So, with that as the background, the housing bears loved the data for February - Halifax said house prices fell by 1.5% and Nationwide reporting a 1% fall.
We find it amazing how negative housing market sentiment is. Mentally, people just don’t seem to be able to enter into the spirit of the current era of ridiculously cheap money and a government and bank stoking inflation. How do people think central London house prices (which historically have led wider housing market recoveries) are back at record highs after 2 months of “anaemic” growth following the first quarter of positive growth since the longest and deepest recession since WWII? Doesn’t that worry the housing bears that something odd is going on, that there is something more powerful at work than the rise in VAT and all the other guff?
The phenomenal recovery in house prices didn’t happen by accident. It happened because globally we have very high asset price inflation caused by very cheap money. In the UK the authorities know that the survival of the UK economy is dependant on rising house prices. As we have pointed out before, falling house prices would mean more bad debts for the taxpayer owned banks and more banks coming under taxpayer ownership – a situation that would multiply the UK budget deficit many times and cripple the country. We think betting against rising house prices is the same as betting that the UK will go bankrupt.
What’s particularly odd about peoples’ reaction to rising house prices is that 6-12 months ago there was widespread speculation that the West would attempt to inflate its way out of its indebtedness. Now that it appears to be happening, nobody believes it. Today oil is back up at $82, factory gate inflation is at a 14 month high of 4.1%, input prices are up 6.9% and the £ is at 1.5 against the $. Nice!
We aren’t complaining though, because all the negative sentiment is great for the housing bulls! The reason that February’s price falls are so great for the market is that it fuels and prolongs the fear. The common misconception that the whole recovery is built on sand, and that the first rise in interest rates will spell disaster, is a great reason for the authorities to keep money cheap for longer, hence fuelling the boom.
The other reason we liked the reports of house price falls was because it gave all the housing bears the confidence to raise their hands again, confirming the high percentage of people that are “out of the market” and therefore the huge potential for house price rises over the next few years. The usual four arguments where wheeled out as to why house prices are set to fall precipitously. We have commented on them below.
Inflation is picking up which means interest rates will soon have to rise. Then the housing market will be toast! That is exactly why rates will not rise soon and if they do, by a small amount. The authorities won’t do anything that will jeopardise the housing market recovery.
The U.K.’s budget deficit is roughly the same as Greece’s, both exceeding 12% of economic output. The markets will force up the cost of borrowing and there will be nothing the authorities can do to prevent it. We aren’t Greece! Greece is a dusty place where they take naps in the afternoon, nobody pays their taxes and the authorities lie and cheat significantly more than they do in the UK. If the UK’s situation does deteriorate significantly it’s likely the same will be true for other countries enabling us to retain our relative position and to print as much money as necessary.
House prices are overvalued and need to fall by 30-40%. What do people mean by being overvalued? The average yield on our 12 central London buy to let flats is 4.2% (at today’s prices). We think that makes property seem cheap compared to current deposit rates and a current FTSE 100 iShare yield of 2.9%.
The house price recovery to 2007 levels is limited to the best areas in central London and does not reflect what is going on in the wider market. That may be true, but who is buying in the best areas of central London? It’s wealthy people that are good at making money! People who are senior in large organisations who understand the bigger picture. We feel more comfortable taking the same bet as them than the same bet as the housing bears who can’t afford those houses.
Disclosure: No positions