Housing market stabilising
As many of you are aware, we have been following the developments in housing markets quite closely, particularly in the UK. The housing markets were both a signpost and then a symptom that helped to drive inflation lower and brought the banking system close to collapse. For the UK, the chart we have focused on the most is the use of mortgage approvals as a lead indicator for the strength of the housing market, and therefore the economy (see here). This relationship appears to have broken down, and it is important to explore why.
While this is a good guide, the banks’ ability and willingness to lend has been greatly diminished, and availability of financing for new purchases is restricted. Mortgage approvals for new purchases therefore remain moribund. This new reality is not great news for house prices, housing activity, and the economy.
The consensus view seems to be that demand/supply ratios have lost their relevance because the volume of transactions is low. We differ – to make a market you have to focus on supply and demand, and this lack of supply is fundamental and reflects the cheapness of housing on a serviceability basis. The UK housing market has traditionally been driven by first time buyers, as reflected by the historically close correlation between mortgage approvals and house prices. This buying power is now limited, but supply is equally limited. New less levered buyers will step into the breach, and existing owners of property will hold on and attempt to service their historically cheap debt. Of course, higher interest rates could rapidly change the supply dynamic, but the authorities are acutely aware of this, and with inflation subdued, rate hikes still look a long way off.
Monetary policy is thankfully working in the UK. Low rates are directly supporting the housing market, and in turn supporting the economy. Now that the housing market is showing strong signs of bottoming, one can become more relaxed that the economy can recover. Deflation is not as likely as earlier this year, and financials look healthier.
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.




16 years of comment
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