The UK housing market has shown signs of life in the last three months. Mortgage advances are rising from very low levels. There is a shortage of property on the market, so prices have apparently risen a little as poor demand puts strains on inadequate supply. After more than a year of hammering, with collapses in transaction volume and prices, many property professionals are understandably out and about talking up the green shoots of market revival.
House prices were at their craziest in central London, in Belgravia, Mayfair and Chelsea. There they have performed surprisingly well. Foreign demand has stayed high, with overseas purchasers experiencing the frisson of bargain hunters. The twenty five per cent or so devaluation of the pound has made property prices look much cheaper to them. The £2000 a square foot top of the market property was $4000 or €2800. It is now $3200 or €2150, so it does not look so dear.
The absence of bankers bonuses looked as if it would hit the next rank down, but this year the bonus revival is riding to the rescue of the Fulhams and Pimlicos. It is outside London that the markets have fared worse. The Midlands, with heavy manufacturing job losses has been much worse than central London.
For years of boom the government told us the reason for high prices and rapid rises in price was the shortage of new building work. The Barker Review and its aftermath led to the government trying to force through more house building. Today the government appears to understand that the main driver of higher house prices was excess credit and money in the years up to 2007. Most of the homes on the market are second hand houses. Their prices rose as mortgage companies expanded the multiples of people’s pay they were prepared to lend, and as valuers responded with ever higher home valuations.
Yesterday the FSA announced new controls on mortgage lending to try to prevent a re-run of the boom of the early years of this century. They wish to ensure better checks are carried out on individuals' incomes to tackle self-certification of incomes that prove to be unsustainable. They also want to rule out additional loan packages on top of the basic mortgage, as people sought extra cash to pay the Stamp duty, removal and furnishing costs and other items.
These measures may make some difference at the margin, but the main cause of how much mortgage lending there will be is the way the authorities control the cash and capital of the banks. On current plans they wish to restrain bank balance sheet growth much more than they did in the heady days before the Credit Crunch. That will mean much slower house price growth or even further periods and areas of falling prices. House prices are about the amount of money available for purchase. A housing boom requires an expansionary banking sector, which we still do not have.
Meanwhile commercial property in the UK has fallen further. There is still more building to be completed to bring more City offices and other developments on stream. We have seen a big expansion of retail space in recent years. There are large amounts of empty property in many towns, and downward pressure on rents. UK property, for long a prize asset for pension funds and charities, is not as strong as it once was. We may still have a legal structure based on restrictive planning controls and upwards only rent reviews, but we have for the time being too much property for the very restricted growth rates in prospect. The money being created by the Bank will wash into all types of assets, but we prefer property overseas where the yields remain attractive without some of the special problems we see in the UK market.