From: "Crowley" 
Newsgroups: uk.politics.misc uk.finance
Subject: Talk of Britain's housing market being headed for stability and "past the worst" may yet prove dangerously complacent.
Date: 29 Jan 2006 02:08:05 -0800
   posting-account=yGNAvw0AAABsgRsckUU2yFAQy4yH8Lsf

A thoughtful article..............

UK house price bubble has not burst but shifted

By Bill Jamieson
29 January 2006

http://www.thebusinessonline.com/Stories.aspx?UK%20house%20price%20bubble%2=
0has%20not%20burst%20but%20shifted&StoryID=3D3B39809A-9423-414D-A887-DE496B=
87E755&SectionID=3D72502421-7F07-40F0-82EE-222A95DED588


IF there is one certainty in economics, it is that the biggest problems
can be made to disappear depending on the statistics used. We may now
have reached that point in the UK housing market where the
"problem" has been made to vanish. Has not even Roger Bootle, the
last pessimistic housing bear, growled in retreat and thrown in the
towel?

The consensus view is that a house price crash has been averted and
that the Bank of England has achieved a "soft landing". The house
price bust has not materialised. The threat is now seen to be behind
us.

But might not the opposite be true? Far from the threat of a house
price boom and bust having subsided, it remains one of the most potent
reasons for the Bank's Monetary Policy Committee not to cut interest
rates this spring. The bubble risk is not buried behind us. It is still
very much "out in front".

How can this be when all the evidence shows house prices have slowed
and are now growing at a more sustainable pace: no busts, crashes or
slumps? According to the widely quoted Halifax, UK house prices rose by
2=2E1% in the final three months of 2005, giving a rate of increase over
the year of 5.1%, the smallest annual rise for 10 years. It calculates
the average UK house price at =A3171,632.

The Office of the Deputy Prime Minister says the annual rate of house
price growth picked up slightly in November, to 2.5%, with the average
home now costing =A3186,431. The Nationwide estimates the annual rate of
house price growth last year at 3%, with the average cost of a house
now =A3157,250 - unchanged from May. For reference, the Land
Registry's average house price figure is now =A3194,589.
Notwithstanding this divergence as to "average" prices and rates of
increase, there is no doubting that the market has cooled sharply from
the double-digit percentage rises recorded for 2003 and 2004.

The statistic most cited for the "no crash in sight" view is that
for mortgage lending. Approvals for house purchases jumped by 51% in
November on 12 months previously. The rise in seasonally adjusted
mortgage lending was =A35.1bn, up from =A34.3bn in October and the
biggest rise since July 2004. This rise continued into December, with
gross lending up 25% to =A326.3bn, the highest December figure since
records began (1964). Gross lending for the whole of last year at
=A3287.5bn was just 1% down on the record 2004 total.

QED, surely, for the "soft landing" school? Well, not quite. There
are issues outstanding. The first is that, if this is the strength of
mortgage demand before an expected series of further rate cuts, is it
little wonder there is concern as to what might happen in the wake of
actual cuts? The fear within the MPC is that further reductions would
inflate a market that has not really lost its "bubble"
characteristics, only this time around there may be no orderly means of
retreat without risking a massive blow to confidence.

Another concern is the reliance on misleading statistical averages. No
one lives in an "average" home. And the average figures happily
quoted by the likes of the Halifax and the Nationwide obscure the
reality of house price stagnation and falling prices in many regions of
the UK. According to Hometrack, which monitors a broad total of 7,500
estate agents across the country, the average house price has already
shown a 4.2% fall since the market peaked in the spring of 2004. Of 54
cities surveyed by Hometrack, 48 saw price falls in 2005, with
reductions of up to 7% recorded.

Against this, Scotland is frequently cited as one area where the
housing market is still resilient, with strong rises recorded last
year. It is widely assumed that the house price to income ratio is
lower (implying that price increases have still some way to go) and
that the market is in a broadly healthy state.

But Scotland historically tends to lag the rest of the UK in house
price movements. And the claims to a more "healthy" state of house
price buoyancy relative to the rest of the UK may not be as solid as
commonly thought. Last Friday, the Bank of Scotland revealed that the
number of first-time buyers in Scotland had fallen to a record low.
Five years ago the typical deposit was =A34,992, equivalent to 23% of
average earnings. Today the typical deposit is =A315,762, equivalent to
about 57% of average earnings. A typical first-time buyer is now unable
to afford a semi-detached property in 81% of towns surveyed, compared
with 9% in 2002.

Now this should worry the "no bubble" school. First, regions such
as Scotland have long been cited as subdued or stable markets that help
bear down on those more worrying "national averages". And second,
without a stream of first-time buyers, the health of the overall market
is in jeopardy. First-time buyers account for just 24% of the Scottish
market, against 37% a decade ago. With the south-west of England, this
is the smallest proportion of any part of the UK. Terraced properties
are now unaffordable for Scottish buyers in 30% of towns, against 7% in
2002. For the record, Edinburgh is now the least unaffordable city in
Scotland, with the average property price representing 7.7 times the
average income of a first-time buyer. Add in the increase in
unemployment and Scottish manufacturing in recession, and it is not
hard to see a weak prop for arguments about the sustainability of
national "average" house prices.

Now there is a respectable argument, and one few would challenge, that
both in Britain and in some housing markets overseas, there has been (a
scary phrase, this, for seasoned stock market investors) a "one-off
paradigm shift", brought about by the widespread and prolonged falls
in inflation and interest rates.

Lower nominal interest rates make possible a rise in debt-to-income
ratios and thus increase the amount of money buyers can afford to pay.
As a result, house price to income ratios have hit historic highs,
Japan of course, being the exception, still recovering from a "lost
decade" of price deflation. The argument, eloquently advanced in a
paper this weekend by UBS analyst Larry Hatheway, is that there has not
been a house price "bubble" in the commonly understood sense of a
flight from rational pricing, but a structural change leading to a
change in lending practices. More people can borrow. And people can
borrow more.

This is fine up to a point. But one of the many issues begged is what
constitutes the standardised average house price - see the range
between =A3158,000 and =A3194,000 quoted earlier - and which measure of
"average" income is used. As a result, as economist James Ferguson
has astutely spotted, in Britain now the price-to-income ratio can
range from 6.2 times to a high-wire 8.3 times, depending on which
figures are used.

Put another way, with the "right" figures you can make this latent
problem vanish, even though it still lurks in the system. Talk of
Britain's housing market being headed for stability and "past the
worst" may yet prove dangerously complacent.