It's the time of the year for reflections, resolutions and prognostications. And what can be more fun than guessing the likely path of house prices?
Well I can think of a few things. And I'm also left wondering why anyone would wish to state a house price forecast publicly and put their reputations on the line. Predicting house prices currently is a bit like trying to pin a tail on a bucking donkey while blindfolded and in front of a sneering audience.
Still they do and I am thankful, because it is their analysis and assumptions rather than the precise number they settle on which interests me. I take the view that if your forecast proves correct it is most likely to be right for the wrong reason.
And while the pundits were woefully wrong in their predictions for 2009, it doesn’t mean their thinking was necessarily at fault.
Forecasters do not control the levers of the economy and can only make assumptions about the actions of the policy makers and other agents that do.
A year ago it seemed clear that house prices would continue to fall fairly rapidly and start 2010 lower than they started 2009. There seemed to be, at the end of last year, a rough consensus that prices would fall by 10% in the coming year, with some predicting falls of 20% or more.
As it happens prices will probably come out flat or up a few per cent, depending on which house price index you prefer to take seriously.
So looking back it is easy to view the forecasts of double-digit falls as a bit silly and over dramatic.
But should we be surprised that the forecasts proved so wide of the mark?
The Bank of England continued to cut interest rates to unprecedented lows. From 5% at the start of October 2008, rates plunged to 0.5% by March 2009. To increase liquidity still further, the Bank began its asset purchase scheme.
As if that kick of adrenalin wasn’t enough, the Treasury was also busy defibrillating the economy with a fiscal stimulus that included a cut in VAT and it had readied itself to cauterise any wounds with £millions worth of mortgage relief should the flow of repossessions rise painfully.
The patient responded. There was no fire sale of homes as homeowners were sheltered from the worst of the immediate effects of the credit crunch.
The continuation of cheap borrowing, particularly for the equity rich, meant a ready-ish supply of buyers. And in a marketplace with greatly reduce activity, cash-buyers accounted for a larger slice.
Potential sellers, meanwhile, were under little financial pressure if their aspirations were not met and could choose to rent out homes they would otherwise have sold. So, the effective supply was constrained in large part to those who could achieve an attractive price.
In the short term at least we had a supply and demand imbalance that favoured house price rises. But only a fool could ignore the fragility of that imbalance.
Things could so easily have been so different and last year's prognostications could have been realised.
So what are the pundits plumping for this year?
Well there is as usual a spread of views, but broadly it seems they are looking at house prices to remain fairly flat. Below is a list (far from exhaustive) of some of the forecasts, to give a flavour of the range.
- Futures market (Tradition Future HPI): 5% rise
- CEBR: 2 – 4% rise
- RICS: 1 – 2 % rise
- HM Treasury (assumption not forecast): Broadly flat
- Nationwide: Broadly flat
- Halifax: Broadly flat
- Rightmove: 0%
- Hometrack: 1% fall
- Cluttons: 1.5% fall
- Savills: 6 - 7% fall
- Jones Lang LaSalle: 7% fall
- Capital Economics: 10% fall
Frankly, to my mind, any of those outcomes would not shock me. Although I tend to feel that the longer-term fundamentals, such as the house-price-to-earnings ratio, and the balance of risk do point more to downward pressure on house prices rather than a rise.
Oddly, there is probably more uncertainty within the market this year than last, not least with a General Election looming. It is just that we are less likely to see unprecedented co-ordinated market-positive interventions from the Bank of England and the Treasury.
But even if most of the risks are on the down side, will they materialise?
Will an event such as a plunging pound prompt expectations of an early rise in interest rates and so push up the cost of mortgages?
Will the rate of unemployment rise more sharply and force house sales?
Will we, perhaps, see a flood of former student lets come onto the market?
There are a host of such questions and uncertainties that can’t simply be dismissed. And with transaction levels so low, it really doesn’t take too much to shift the balance of short-term supply and demand in the housing market and so the shift the price that those homes that are traded fetch.
It must be remembered that less than 5% of the housing stock sells each year, so any measure of house prices in an absolute sense is suspect. And with buyers and sellers skewed from what might be thought of as the norm there is even more question over what the indexes mean.
Further the response of house prices to the current economic climate varies wildly both by regional and market sector, so an all-embracing index provides far less value in terms of its ability to tell us what is going on.
I wouldn’t go as far as to say house price indexes are meaningless at the moment, but I certainly would say you need to treat them with caution and, if you wish to put meaning to them, apply some context.
So given this high level of uncertainty and what I felt was the reasonableness inherent in most of the assumptions made by most of the “experts”, I was a bit disappointed to read the somewhat provocative headline put out by the economic consultants at CEBR, which read: “Pundits expecting house price collapse will look like turkeys by next Christmas, unless the pound really fowls up.”
I was further disappointed that CEBR felt the need to suggest that it had been on the right lines last year in its forecast, particularly when as late as August its central forecast was for a fall in house prices in 2009 of more than 7%.
Still. I guess forecasting is a competitive game. And I do love my sport.