As an economist, it is easier for me to predict house prices in five years' time than in a year's time, for two reasons. First, while fundamentals drive long-term house price movements, short-term movements are driven by sentiment. For that you need a psychologist, not an economist. Second, if I predict house prices in five years' time, people will have forgotten my prediction by the time we can assess its accuracy—although if I am right, I will remind people of it when the time comes. Shorter predictions give the reader less time to forget.
But let me take the plunge with a short-term prediction: average house prices will not fall by more than 10 per cent over the next year, and in five years they will be higher in real terms than today. At first sight this is an optimistic scenario, and for owners it is indeed a positive outlook. But for those struggling to get on the property ladder, or those putting off having a family because they cannot afford a decent place to live, it is far gloomier.
Sentiment has clearly turned down in the markets, and on some measures houses are (fractionally) cheaper than a year ago. House prices escalated to a point where supply exceeded demand, and prices fell. But we only reached that point in the last six months.
This fits with my own impressionistic sense of an overvalued market: the construction of studio flats. No one wants to live in a studio flat long term. It's not a nice way to live—I know, I did it once. So my own indicator of prices being too high is builders building studio flats. At first people buy them—it is all they can afford—but then they realise that this is not the good life, and that they would rather rent. The loss of demand ripples through the market, and prices start to fall.
Last autumn I noted an upturn in the number of new-build studio flats advertised in the Evening Standard and realised the market was overvalued. But the fundamentals are sound, and it has not been overvalued for long. A 5 per cent correction would suffice if these were normal times.
But they are not. A change in the capital gains rules mean that the buy-to-let crowd have a bigger incentive to sell out now than before, and this will depress the market. The collapse of inter-company bank lending has hit the mortgage market, reducing mortgage availability and raising interest rates. This will also depress the market. Finally, if eastern European immigrants go home in significant numbers, demand in the rental market will fall, leading another group of buy-to-let investors to sell up.
Gordon Brown's proudest boast was to have abolished boom and bust. That claim was always overblown. There is much that is wrong with the British economy today. But even so, the IMF predicts positive growth this year and next, at over 1.5 per cent. That is not the sort of figure that implies a significant rise in unemployment. Remember the early 1980s and early 1990s, when the nightly news was dominated by firms shedding workers? A million people are not about to lose their jobs. And in a world in which countries like China are now big enough to sustain world economic growth, we are all less vulnerable to a US downturn.
Strong fundamentals, good management at the Bank of England, the presence of large, well-capitalised firms such as the HSBC—these all limit the short-term downward pressures on the housing market. Prices will not fall by more than 10 per cent.
Meanwhile, Britain continues to build too few houses. In fact, we build fewer houses than the number of new households. A rising ratio of households to houses means only one thing in the medium term: higher house prices. In addition, as we get richer, we all want to live in bigger houses. And ideally, we would all like a second home, and as we get richer more of us will be able to afford one. This all puts upward pressure on the housing market. Unless Britain builds a lot more houses, therefore, house prices will continue to rise in the medium term—and the only people who will be able to afford them will be a handful of City bankers and those with rich parents. Is that the sort of society we want to live in?
