As already foreseen in previous posts:
British, Especially London, Property Prices Start To Fall !!
The average asking price for homes that came on the market last month was 2.9% lower than in July, a record fall for the month of August, according to the property website Rightmove.
Asking prices usually fall in summer but last month’s figure was exacerbated by a steep drop in expectations in London, where new sellers have come in at lower prices for three months in a row as an influx of homes on the market has forced them to price more competitively.
Across England and Wales, the average asking price fell by £7,750 compared with the previous month, the biggest dip since Rightmove began collecting the data in 2001. In London, the price drop was 5.9%, far bigger than the falls in June and July.
Yes, there is a seasonal effect at play in this story but three consecutive months of declining prices does begin to look like at least the start of a trend, doesn’t it? And the worry is as the FT says:
A gentle slackening to a more moderate and rational pace of house price inflation.
That’s definitely how these markets work, right?
No, no it isn’t, and that’s what should be worrying some people. For example, those Tory MPs who would quite like to get re-elected next spring. The one thing known to really annoy the British electorate is falling house prices and if we’re seeing a turn in the market now then that turn will be in full swing by that election comes around next May. And sadly they’ve hamstrung themselves by insisting in the Coalition agreement that it will be a full Parliament, one with no early election.
As to why we expect housing markets to overshoot, both on the way up and the way down, that’s something that Robert Shiller, one of last year’s Nobel Laureates, has explained to us. Speculation in a market has a function in tampering the wilder swings of what happens. Agreed, that’s not normally the way we think of it, we think of speculation as being what causes those overshoots and that’s true for one meaning of “speculation”. However, Shiller points out that a market will only be efficient when all views are incorporated into the prices in that market (this is obviously the obverse of the efficient markets hypothesis) and that means that people must be able to speculate short as well as long in a market. And housing, residential housing at least, is almost impossible to go short upon. So the views of those who think that housing might decline in price aren’t incorporated into those market prices. You can be not in the market at all, that’s possible, but you cannot go short.
Given the absence of that short sentiment therefore house prices will overshoot on the way up. And once the boom ends, the bubble bursts, precisely because of that overshoot therefore they will slump further than they otherwise would have done. Along with all of the horrors that brings, from negative equity (and it’s worth noting that the UK is a mortgage recourse country, you can’t walk away from the house and thus escape the debt) to the fall in consumer spending as a result of the wealth effect going into reverse.
All of which is why Shiller recommends that we set up more speculative markets in housing, including futures and options so that people can try shorting the market. Yes, the solution to housing speculation is more speculation.
As it happens the UK economy is looking in good shape generally. GDP is increasing, we’ve just, by the skin of our teeth, reached the pre-recession peak (although not yet on a per capita basis) and we seem to have the best growth rate in the G7. All of that would be at risk if that property bubble does burst: which is, as I say, why this should make certain politicians rather nervous. Because if this is the beginning of a crash then there’s just not time before the next election to reverse it.