Homes are for living in and should not be handled and viewed as an investment opportunity. This would have been sound advice when house price inflation was relatively flat from decade to decade, but it’s hard to listen when in the last 50 years, a two bedroom bungalow in the Home Counties may have risen in value from £400 to £400,000.
We hear a lot about how house price inflation has slowed over the past 18 months, and the trend is good news because double-digit inflation is unsustainable. However, the slowing trend has been seen as a result of rising prices affecting levels of affordability, which ties in nicely with a steady decline in transactional volume in the existing housing stock.
But this does nothing to explain why new build houses are still selling like hot cakes. The truth is that housebuilders can pick and choose where they build, and predictably they build where they think people would like to live.
There are further anomalies to explore. If, for example, the secondary market is being constrained by a lack of sellers and so-called Brexit uncertainty affecting both prospective buyers and sellers, why is it that house price inflation exists at all? If numbers from the Halifax are anything to go by, house prices in August rose by 1.1 per cent, up from 0.7 per cent in July, taking the annual increase up from 2.1 per cent to 2.6 per cent.
Any advance on this rate of inflation is likely to be limited, mainly because of the burden imposed on sentiment by Brexit, an irritating get-out clause that allows the real picture to be clouded not by what is happening but by what may, or may not, happen next.
Still, if we take the very modest house price inflation rates experienced over the year since the referendum vote, existing homeowners may still be on to a good thing. Online estate agent eMoov has been running some figures through the computer which suggest that if we take the average monthly increase in house prices since the referendum vote of just 0.37 per cent per month, which is a big dip from the 0.67 per cent seen in the year prior to the vote, house price inflation in the next decade would still equate to a rise in average prices of 56 per cent.
This could all end in tears for a number of reasons; weak wage growth, rising inflation and higher interest rates spring to mind, but underneath all of this remains the ongoing and little resolved imbalance between supply and demand.
Next week’s economics…
Monday sees the release of house prices from Rightmove for September. The online agent reported a 0.9 per cent drop in August, taking the year-on-year increase down to 3.1 per cent. However, the Halifax has already announced a 1.1 per cent rise for August. The difference is not that important; regional variations make average rates of change little more than a broad indication of the underlying trend. But what seems likely is that house price inflation will continue to moderate over time.
Retail sales data released on Wednesday are expected to have risen by 0.2 per cent, down slightly from the 0.3 per cent rise registered in July. The smaller increase will reflect the fact that previous numbers were boosted by a sharp rise in food sales, which is not expected to be repeated in August. Public sector finances for August are released on Thursday, borrowing having risen by £1.8bn in July to £22.8bn for the current financial year so far.
The Office for Budget Responsibility is forecasting that borrowing for the year to March 2018 will be £58.3bn; that’s up from £45.1bn in the previous year. Public sector debt reached £1,758.3bn at the end of July, equivalent to 87.5 per cent of GDP. And if current projections are correct, the UK will have been running a deficit for 25 years before a projected surplus is forecast by 2025. By then, the UK will be spending more on servicing its debt than it does on the state education system.
Chris Dillow is on holiday
