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Our synopsis of the housing market this quarter reads rather like an end of term school report. “Could do better” and “room for improvement” seem to be an underlying theme.

Despite the increasing signs of activity and positive price growth in the first half of 2013, the undeniable fact is that the housing market has not so much underperformed as simply not functioned for the last five years.

Full real estate cycles seem to take as long, trough to trough, as a child takes to reach adulthood (1958, 1977, 1996) so our underperforming infant is now moving from kindergarten to primary school. Despite all the talk of an artificially-induced housing boom, resulting from ‘Help to Buy’ and other government measures, this infant housing market is far from performing like the previous housing cycle did in its late teenage years of 2006 and 2007.

The details of each cycle are different, but in real – inflation-adjusted – terms, we are still in 1994 with this one. There are strong reasons to suspect significant, real growth is some way off. We are still far from a housing market boom – although the next three years may look like a mini boom in relation to the last five.

Although household debt is not rising as it was, further deleveraging is still needed. Low interest rates have meant that there is no mechanism, through repossession and oversupply for example, for house prices to fall further in nominal terms so inflation is doing the job of reducing real house prices to more accessible levels. This could be a long process. Household incomes will also need to rise significantly before purchase power is sufficiently strong to create anything like boom conditions. They will be further dampened by an eventual inevitable increase in interest rates, currently expected around 2017.

Meanwhile, one precocious pupil has been behaving differently to the rest of the UK. The prime central London market has been scoring consistent A’s for growth over the last three years. Some teachers have complained that this is having a disruptive and negative effect on other UK and London markets. Rather, we think there is a case for considering this market is in a different school altogether; an international school of world cities with a very different curriculum majoring on world trade, flows of capital and economic activity.

If this is the case, it may well be the characteristics of the coming market cycle will be different again to the three we have seen since the 1970s. We have seen a growing divide, both sectoral and geographical, between the borrowing-reliant and the capital-rich markets over the years. It now seems likely the high-demand markets within the influence of London (which covers most of southern England) will behave differently to the rest of the UK.

Our two housing market schools will therefore respond to different stimuli and disciplines over the course of the next cycle. We anticipate it will be increasingly difficult for government to manage both of them with the same policies and we anticipate that more markets in the South of England will start getting the grades to enter the London school as its influence spreads to the commuter zones. We expect increasingly higher grades in these markets over the next three years.

Taken from
Residential Property Focus Q3 2013

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