There’s a political element to all this, although mostly it’s to do with the inherent laziness of journalists. Any perceived economic reversal, whether it be linked to property prices or the price of a cup of coffee, can be laid at the door of the UK’s decision to break away from the European Union.
It’s become the default option, an easy assumption for journalists who can’t be bothered to undertake the most rudimentary data analysis. And it’s not as if there weren’t any genuine theoreticals to take on board. This time last year we highlighted one of the more predictable aspects of the run-in to Brexit, namely the risk that industries would lockin increasing amounts of capital through the expansion of inventories. The unwinding of said inventories has had a discernible impact on domestic purchasing managers' indexes since the second quarter of 2019.
I dare say there is also a London-centric element. After all, London was “the weakest performing region in Q3, closely followed by the surrounding Outer Metropolitan region, with annual price declines of 1.7 per cent and 1.5 per cent respectively”. Nationwide did point out that, although the latest figures represent the ninth consecutive quarter in which prices have contracted in the capital, they are still only around 5 per cent adrift of the all-time highs recorded during the first quarter of 2017.
Across the UK, house price growth nearly flatlined through September and growth rates have been below the 1 per cent mark during 2019. Nevertheless, “the underlying pace of housing market activity has remained broadly stable”, reflecting a resilient labour market and low borrowing costs. Any softening in the economy has centred on business investment, as household spending has been supported by “steady gains in employment and real earnings”.
Fear is the key, apparently. Recently published analysis by KPMG found that house prices are likely to drop by around 6 per cent across every region in the UK in the event of a no-deal Brexit. Regrettably, if fears of such a scenario were to take root among buyers and sellers, it could become a self-fulfilling prophesy, but it ignores the principal underlying reason why prices – or, more revealingly, volumes – have trailed off, especially in London and the south-east. And that's simple affordability.
Real wages may have started to ratchet-up, but house price-to-wage ratios remain well above historic norms across the country. No one could be surprised that we find ourselves in the midst of a lengthy correction. Figures from the Office for National Statistics reveal that, on average, workers in UK can expect to pay an estimated 7.8 times their annual wages on purchasing a home in England and Wales in 2018.
If the average wage earner was looking to buy in the upmarket London borough of Kensington and Chelsea, he or she would be looking at a ratio of 44.5:1. Indeed, most boroughs that had become less affordable in the five years prior to 2019 were in London, the south east and the east of England – the same areas that are now seeing the most pronounced relative declines. Short of government intervention, completion volumes for existing (ie, non-newbuild) properties will remain under pressure until ratios start contracting.
Next week’s economics…
We are likely to gain further insights into housing affordability due to the imminent release of more data covering house prices and unit labour costs, but we imagine it will be a while before the latter serves to ameliorate the former.
The problem with house price data, or any empiric data for that matter, is that they don’t always reflect the underlying catalysts. In terms of the housing market, it’s easy to miss the distorting impact of the government’s Help to Buy scheme. Curiously, the scheme was introduced at a time when the Bank of England’s Mortgage Market Review was effectively putting the screws on higher-risk lending options. By the time regulators introduced affordability checks and limits on property/income ratios the damage had been done, with newbuild property markets distorted due to the relative ease of financing. Following an initial demand-driven price surge, many Help to Buy mortgagees now find their low equity arrangements have made them vulnerable as prices falter, thereby exacerbating an already weak secondary market.
We’re at the wrong end of the credit cycle, with overall growth in unsecured consumer finance falling to a rate of 5.4 per cent, with credit card lending up by just 4.9 per cent year on year in August. The consumer sector and a favourable labour market have combined to underpin growth rates in the economy, even as industrial output has come under pressure. We’ll get some idea whether it’s a dissipating effect through the release of retail sales figures in the early part of next week.
Thursday 10 October will see an avalanche of economic data covering monthly GDP, industrial production, manufacturing production, construction output, index of services and trade balance.
