Housebuilders are unlikely to risk undermining a shaky recovery by building more houses – more’s the pity
House prices have been hitting highs recently, leading to concerns they are outstripping the capacity of the real economy to support them.
Despite the wider economy experiencing six consecutive quarters of negative growth and the official measure of unemployment moving within a whisker of 2.5 million, the Nationwide building society claims residential property prices across the UK are now just 13% below the autumn 2007 high. Agents in parts of London are already talking about a return to peak levels, and the October RICS housing market survey refers to the re-emergence of gazumping.
Indeed, house prices are rising despite a constraint on demand through a lack of mortgage availability. Banks and building societies are unwilling to bet on the market, but this caution has almost been superseded by a lack of desirable property. Whether it is down to so-called “reluctant landlords” or existing homeowners making well-judged investment decisions, the RICS survey provides clear evidence that new instructions to estate agents are rising only modestly. This is contributing to the squeeze in prices in certain areas.
Nonetheless, there are questions about how long the upward move in house prices can continue. There is a sense the housing market is in a “sweet spot”, in which it cannot remain. The dangers are that there will be further increases in the jobless total, or that monetary policy will begin to be tightened.
This is likely to mean higher mortgage costs, which could be painful for borrowers who have stretched themselves, fearing the market was beginning to run away from them.
Over the long term, I believe more cautious behaviour by housebuilders, who will be averse to building at the volumes of yesteryear, will keep starts far below what is needed. This will compound the imbalance between demand and supply.
It is clear that the structural trend is pushing buyers to pay ever-higher prices, even though they are pushing themselves to the limits of affordability.
Bubbles in equity may inflate and explode, driven by cheap borrowing. However, history has shown people who are able to access the housing market in the UK that they are onto a winner. The worry is that more people will be shut out.
Simon Rubinsohn is chief economist at the RICS