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From The Sunday Times

January 13, 2008

Home economics - January's shock house price stats

Even in a weak market, house prices have not lost the capacity to surprise

David Smith

Even in a weak market, house prices have not lost the capacity to surprise. Nobody expected the Halifax, Britain’s biggest mortgage lender, to announce a 1.3% rise in house prices for last month. I suspect that even within the bank, there was a certain amount of head-scratching.

The Halifax’s latest jump in prices contrasts with a 1.8% fall in December 2006. I don’t remember that being such a weak month, just as I don’t recall December 2007 being such a strong one. Perhaps December is a difficult month.

To be fair to Martin Ellis, the Halifax’s chief economist, he did warn that a pattern of unexpected rises and falls is what you get in a slowing market. But the figures reinforce the warning I gave in last week’s column – that straight-line extrapolations, while easy, are rarely a good way to predict house prices.

On a raw basis, incidentally, the Halifax figures pointed to a doubling of annual house-price inflation between November and December, from 3% to more than 6%. The bank prefers to concentrate on quarterly data, which showed a 2007 price rise of 5.2%.

So, what has really been happening to house prices since the credit crisis broke in August? If we take the Halifax, it showed a 0.3% rise in August, followed by falls of 0.6%, 0.7% and 1.3% in September, October, and November, then December’s 1.3% rise. Cumulatively, prices were 1% lower last month than in July.

We also have the Nationwide’s take on the same period.

Its monthly readings were: August, up 0.6%; September, up 0.6% again; October, up 1%; November, down 0.8%; December, down 0.5%. Compared with July, it showed a cumulative rise of 0.9%.

A useful way of ironing out contradictions in these series is to take an average of the two. On this basis, prices were up in August, flat in September, up fractionally in October, down sharply in November and up again in December. Taking both together, prices have been flat since the credit crisis broke.

If you wanted to be optimistic, you would say that November marked the point of maximum gloom, when the full effects of the Northern Rock affair and the credit crunch were felt. Yet it might be a little early to draw that conclusion, given that the Bank of England’s credit conditions survey, published earlier this month, suggests mortgage availability will be tight in the first three months of the year.

The other health warning is that recent movements in both the Halifax and Nationwide series might have been distorted by the staggered introduction of home information packs.

So, there are plenty more thrills and spills to come. As we have seen in the past few months, you can have broad stagnation in house prices, but generate a thousand “crash” headlines. For me, the Halifax’s rise was reassuring in one sense. For prices to be broadly flat in 2008, we will need both monthly rises and monthly falls. December was a reminder that you can still have monthly rises.

home.economics@sunday-times.co.uk

Gents, Ladies: The Â£ has fallen 15% against the Yen and a little less against the â‚¬ and $. So property prices in $ has already fallen by that much. Convert your Â£ into $ or Yen and sit tight.

Kara Swart, London, UK

And hereâ€™s some extra food for thought: the law of demand is defined as the willingness and ability to purchase a good. Both these components are essential. So while there may be the willingness to purchase homes (although this may be on the wane due to the media spin â€“ something you have a point about), the credit crunch will seriously hamper peoples ability to pay. This is due to the fact that people are reliant on mortgage financing to purchase homes and the credit crunch will lead to far stricter lending criteria and almost no BTL lending (if it hasnâ€™t already). Without the ability to pay for homes, the level of demand for homes will drop by definition.

So while supply remains constant in the short term (it takes a relatively long time to build new houses), demand for homes is dropping. Economic theory would therefore suggest that in the short term we are due a fall in the price of homes. What happens in the long term is anyoneâ€™s guess.

Stephen, London,

Chris Beckett:
Iâ€™m not sure which school of economics you studied at, but there certainly is no economic law/principle/tenant that says that low supply means high demand! What the laws of economics do say is that the level of supply interacts with the level of demand in order to determine the price. As such, the level of demand is treated independently from the level of supply. So you could say â€˜low supply means high price, all things equalâ€™, but certainly not â€˜low supply means high demandâ€™.

Stephen, London,

Gerry Lynch:
You're right about the Halifax stats not being based on actual sales. Interestingly, Land Registry data (actual sales prices) give an even less pessimistic (and because it's fact, realistic!) view of what's going on - although their volume data unfortunately is only reported 2 months in arrear. Strange as it may be, the only actual "price drops" seem to be of unrealistic asking prices. I personally think this is a good thing - but it's a very very different issue from falling actual house prices.

Ann, Sydney, Australia

WHY OH WHY do the media continue to try an whip up a storm that does not need to happen. The more they go on about problems, the more people believe it. HOUSE PRICE data says prices rose last month but that gets reported as "House price inflation drops" - Houses price falls get reported as "house price crash" -
Unless we start to get mass unemployment we will remain stable with the decision to move a choice not a necessity. The buy to let landlords have begun to make better returns as rents are creeping up and supply is dwindling. Yes i accept some prices ( which were over inflated in the first place) will come back slightly, however that is very different from the doom that is being spread by the media. The government say we need millions of new homes to keep up with demand but they are not being built. Basic economics Low supply means high demand ( despite the 5 rules listed by AA kirkwall)

Chris Beckett, Plymouth,

The upcoming recession together with the credit crunch will push the price of houses further downward. Are falling prices such a bad thing? For 10 years the economy has been dependant on house price inflation. We need to rebuild to take this dependancy away.

david barker, chelmsford,

A refreshing, but overly-optimistic article.
My view is at least 10% falls in 2008 and at best a stagnant market through 2009 and into 2010.
Reasons? - wages have to be allowed to catch up and recover some affordability, buy to let amateurs time to sell and invest in something more stable, immigrants to move back home or to more bouyant areas of europe as borders open to them, and the full effects of the global financial crisis have worked their way through the system.
As someone once said, 'you can't buck the market.'

george, aylesbury,

The Halifax statistics refer to mortgage approvals, not actual sales. In that case there are three additional factors that may be relevant:

1. In the present market between mortgage approval and final sale, purchasers will have greater leverage to negotiate a reduced offer.

2. First time buyers and buy-to-let purchases have collapsed since the summer. This means the mix of house sales has changed to more expensive properties.

3. In a similar vein in a falling market purchases tend to be more driven by need (new job etc) again these are more likely to be between existing house owners.

I know the Halifax statisticians try to do their best to correct for such factors but they inevitably use standard models which cannot perfectly reflect changing market conditions.

Gerry Lynch, Chichester, UK

The Boom/Bust Cycle contains 5 stages.

1. Relatively Stable price as currently no speculation.
2. Parabolic rise in the price, primarily driven by greed.
3. Temporary state of equilibrium and a pause in price movment.
4. Fear becomes Panic as people become desperate to sell.
5. Prices become stable again and a new equliibrium occurs between buyers and sellers.

(although there are variations in price and time scales, this is pretty constant in all boom/bust cycles).

We have passed the second stage where everyone says 'but it is different this time' and have entered stage 3. We will soon be entering stage 4.

Good luck, its a long way down from the top.

Adrian Allen, Kirkwall, UK