Pop goes the property boom? Not in the real world.

Implications: “The spectre of negative equity that blighted so many households in the 90s is back with a vengeance”.  Is it?  Articles like this can be very influential in determining market sentiment so may become self-fulfilling prophecies despite the facts.

Analysis: The housing market is very much dependent on sentiment.  Commentators are talking up a house price crash in the UK that isn’t.  But if they continue talking like this, it could well become one.  

There is no doubt that housing market activity is very subdued, and may be as far as 40% down on activity levels 2-3 years ago.  Rates of repossessions are increasing.    However:
·        Whilst there is a very small reduction in house prices over the last quarter, annual comparisons are still positive.
·        The picture is very patchy.  

Regionally, Scotland is still enjoying positive house price movements, even on a month on month basis.  London and one or two other large cities are suffering declines.  As London is where most of the commentators live, they seem to be applying their sentiment to the whole of the UK.   

There is a particular problem area in the UK housing market, namely city centre apartments.  This is particularly the case in cities where there has been very large scale urban regeneration activity over the last few years, and in particular Manchester and Nottingham. 

In the late 1990s, the incoming Labour government promoted its Urban White Paper, which set the context for much planning and housing policy over the last 10 years.  There has been a concentration on regeneration of inner urban areas, and one of the policy tools for achieving that has been the virtual prohibition of releases of green field land for new housing development. 

Whilst that is now changing in the “growth zones”, there is still a heavy concentration on redevelopment of brown field sites in the centres of towns and cities.  In many of these areas, much of demand has been driven by investors looking to invest in property rather than equities. 

There has been huge capital growth, particularly over the last 4-5 years, as a result of which many first time buyers can no longer afford to enter the housing market.  In city centres such as Manchester and Nottingham, the market has been driven by investor/speculator activity, as a result of which there has been a vast oversupply of particular types of property, which do not reflect local need, or customer preferences from first time buyers.  In terms of activity levels, the bubble has certainly burst, particularly in those areas.   

In most locations, decisions by first time buyers to delay purchase pending the much trailed “correction” in prices has let to an increase in demand for rented housing.  If anything, in most areas, demand for rented accommodation has seen rents stabilise or even increase.  However, in the areas of most intense investor/speculator activity, there is no doubt that both rents and sale prices are falling. 

This article suggests that prices have dropped by 30-40%, but that of course is a particular product in a particular location with particular characteristics in terms of seller/buyer dynamics.  

Overall, let’s not forget the huge differences between the UK and the USA:  household formation is still running at 230,000 pa, whereas house building has fallen over the last year from around 180,000 to 165,000.  There is no doubt that there is a slowdown in market activity.  Equally, there is no logic to support the view that we are heading for a crash, despite the best endeavours of over-excited commentators based in London.