Wednesday, 4 August 2010

UK & EUROPEAN PROPERTY - Don't blame the Yanks, we all did it

Excellent piece by Ambrose Evans-Pritchard today on the global scope of the rise in house prices...

Lots of absurd political finger-pointing has gone on between the Europeans and Americans about who was to blame for the collapse, but there's no doubt that policy-makers in almost every developed country happily encouraged the blowing of the bubble on its way up.

As is Europe's wont, we lag the US in most trends and this time in acknowledging harsh economic reality: in all these bubble economies either wages must rise to meet prices, or prices must fall to meet wages, for housing markets to regain their long term equilibrium.  

Prices v UK avg. incomes: unsustainable

A solid, multi-year uptrend - the kind our parents saw long before the manias of the nineties and noughties set in - can not return until three legs of the stool are in place: prices have fallen back to within widely affordable levels, the demographic picture (family formation) from which real demand stems has improved creating a growing need for loans, and banks take the locks off and start lending again.

Not one of these requirements is yet in place.  The US is closest to the bottom, but another downleg is almost certainly needed before the worst of the bleeding is over.  The UK and most European nations which participated in the bubble have barely begun to bear the pain, as price falls are disguised and distorted.  

Mortgage applications, which lead transactions, which lead prices, bounced in mid-2009 but have fallen since, suggesting a downward adjustment is just a matter of time.  Meanwhile, most homeowners glide on blissfully unconcerned.  With a goldilocks combination of low base rates and widespread use of tracker-rate mortgages, unemployment which has been less severe than expected (soon to change with cuts across Europe) and banks' lenient policies towards their more troubled borrowers, the fantasy housing market lingers.

Yet it cannot last forever and the first cracks in the rebound are beginning to show.  Once unemployment from the Europe-wide austerity packages begins to bite over this coming year, watch for an acceleration of the downward pressures lurking just underneath the surface.  Wise sellers are returning to the market, lifting supply figures and tipping the odds in favour of buyers.  If you're thinking of selling, conditions may never be better than they are right now.