House prices 2017

Lots of commentary on house prices. Below are charts based on real data from the Nationwide house price index (in the UK) on a monthly basis recorded since 1991.

The recent data 2016 to 2017 suggest a slowing down of house prices increases. The absolute value does need to be looked at in the context of other broader terms, such and salary multiples, interest rates, general inflation baskets or other asset classes (debt, equity, FX rates & foreign property etc).

Are there any conclusions which can be drawn from the historic data ?

In answer to this, yes. The chart shows sight of maximum and minimum rates of change on YoY basis with the good years increasing by upto 25% and the bad years falling by upto 15%.

Where will this cycle lay given the above ? unless the recent slowdown is indicating a leading edge trigger (for a large down-move) and outside of external shocks the UK housing market is expected to be reasonably uneventful as a stand alone asset class.

The reported supply-demand imbalances remain broadly unchanged with home-builder completions remaining reasonably consistent and the same to be said for mortgage approvals.

So what are the risks going forwards ?

Looking at the economic data, a downturn is unlikely to be lead by a UK property crash. So, the risk really lays with external shocks. Potentially an unwind of the higher than average earnings multiples on major equity indices, although this would be a short fast correction (and potentially supportive of a safe haven asset class). Nevertheless a repricing from 25-times earnings multiples to, say, 15-times would be a massive hit to the capital markets.

Political events are the more likely scenario. Two major shifts so far being Brexit followed by US presidency indicating a globally increased hostile environment. Increased tensions are the base case, so the black-swan event may be action by a rogue country such as North Korea as opposed to the more expected middle-east tensions that persist.

External economic factors, such as inflation lead by import prices. In may ways this could weigh quite heavily, for example, oil and copper are both at historic lows and any reversion in those would fast act on inflation forcing an interest rate rise. This causes increased borrowing costs which feeds directly into falling property value on a large scale. The flip side of this is that the weaker pound would buffer such to a reasonable degree.

What property assets would be affected ?

Based on relative moves, one may expect high end property to be most affected simply on an affordability basis. There are reports that such property’s have already begun to normalize over the past year.

Another dynamic, which is continuing is the shift away from local shops (“the high street”) into shopping parks or large cheap rural hubs driven by the rise in online which is set to continue for some time. There are many formats of commercial that have become irrelevant or at least huge drops in demand, for example physical bookstores (amazon), banks (mergers + online), grocery (supermarkets + delivery) and simple have no need for replacement. When commercial leases expire, the desire from the tenant to renew or extend simply is not there in those many cases.

 

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