UK: Deloitte Monday Briefing: Housing Markets Readjust

Last Updated: 20 August 2012
Article by Ian Stewart

The Monday Briefing, written by Ian Stewart, Deloitte's Chief Economist in the UK, gives a personal view on topical financial and economic issues. Please feel free to forward the Monday Briefing to your clients, colleagues and friends who can, in turn, subscribe to it at:

www.deloitte.co.uk/mondaybriefing.

  • Last decade's global housing boom turned to bust in 2007.
  • House prices have fallen in most western economies and have collapsed in the US and Ireland. Indeed, US housing is now 30% cheaper than in 2007 while Irish house prices have almost halved.
  • Most other countries have not seen such a sharp decline in property prices. According to the Economist, housing is still significantly overvalued in several countries, especially in Australia, Singapore, France, Sweden, Spain and Netherlands.
  • In the UK, the Economist estimates housing to be 26% overvalued relative to rents, although prices have shrunk by a tenth since the crash. With low interest rates limiting foreclosures and supporting interest payments on mortgages, UK house prices have proved relatively resilient.
  • However, the pressure on house prices has intensified over the last twelve months. With a renewed recession in Europe and rising financial uncertainty, property prices in peripheral Europe have begun to slide. The slowdown in the West has also hit house prices in emerging Asia.
  • In more than half of the 21 countries tracked by the Economist, house prices have fallen over the last year. With housing still quite expensive in most of Europe and Oceania, the risk is that prices will drift lower.
  • Housing was one of the big bubbles of the boom era. Falls in house prices are a painful part of rebalancing national economies. In this process, the US has made significant progress.
  • Although US house prices continue to fall, the US housing market is beginning to show signs of life. The Economist's data suggest that US houses are 12% undervalued relative to rents making them attractive targets for homebuyers. US housing starts hit a 4-year high in June. It is perhaps in anticipation of this turnaround that shares in homebuilders have risen 55% this year.
  • German housing also looks cheap relative to long-term yardsticks. Germany's mix of low housing valuations, a buoyant economy and cheap financing is unique in the industrialised world. Although house prices have begun to edge up there, German housing remains the most undervalued in Europe relative to incomes and rents.
  • Low rates of owner occupation, low levels of housing market turnover and conservative lending policies on the part of banks have acted as a drag on German house prices. A cursory search on property sellers' websites reveals that a similar 2-bed flat situated 5 kms from the city centre costs three times as much in London as in Berlin!
  • Of course, prices and affordability vary wildly by location. According to an annual housing affordability survey run by Robert Breugmann, a professor at the University of Illinois, London is the seventh least affordable housing market in the world with the average house priced 6.7 times the median income of Londoners. At the other end of the scale is America's auto-hub Detroit with houses priced 1.4 times median incomes.
  • In large cosmopolitan cities such as London, which see significant interest from foreign buyers, exchange rate fluctuations also play a key role in determining property prices.
  • A depreciating currency makes a nation's assets cheaper for foreign buyers. Over the last few years, the depreciation of the sterling has made British housing cheaper for most foreigners. For a Chinese buyer, who has seen the yuan appreciate against the dollar and the pound, property in London is now 35% cheaper than in 2007. The rising yuan has, on the other hand, inflated property prices in Beijing and Shanghai for people living outside China.
  • Five years on from the start of the financial crisis, housing in much of the industrialised world still looks pricey.

MARKETS & NEWS

UK's FTSE 100 ended the week flat.

Here are some recent news stories that caught our eye as reflecting key economic themes:

KEY THEMES

  • UK consumer price inflation rose unexpectedly to an annual rate of 2.6% in July from 2.4% in June, driven by higher air fares and housing costs – inflation
  • The UK government announced that train fares will rise by an average of 6.2% from 1st January 2013 – rail travel inflation
  • The number of unemployed people in the UK fell by 46,000 in the three months to the end of June, falling to its lowest level for nearly a year – unemployment
  • US annual inflation fell to a 20-month low of 1.4% in July, driven by a drop in energy prices – US inflation
  • US industrial production grew by 0.6% in July, up from 0.1% in both June and May – US growth
  • The VIX volatility index, a popular measure of financial 'fear' in US equity markets, recorded its lowest level since 2007 – US confidence
  • A Bank of America (BoA) Merrill Lynch survey of international fund managers recorded the largest leap in confidence about global economic prospects since 2009 in August – confidence
  • Olli Rehn, the vice-president of the European Commission, warned that the eurozone is at a "decisive juncture" and revealed plans for "Economic and Monetary Union 2.0" – eurozone crisis
  • Otmar Issing, former chief economist at the European Central Bank (ECB), claimed the eurozone "should have started with a smaller number [of countries and] with stricter rules" in an interview with CNBC – eurozone
  • Spanish banks borrowed a record €402bn from the ECB in July, a rise of 10% from June, according to data from the Bank of Spain – banking stress
  • The eurozone banking sector is now smaller than that of Australia in terms of market capitalisation, according to data from BoA Merrill Lynch – banking stress
  • The Greek economy declined at an annual rate of 6.2% in Q2 2012 – Greece
  • Greek prime minister Antonis Samaras is to seek a two-year extension of its latest austerity program from eurozone leaders, according to the Financial Times – eurozone crisis
  • Italy's public debt rose to a record €1.97bn at the end of June, due largely to a large rise in Italy's share of bailouts for other eurozone countries – Italy
  • Finland's foreign minister, Erkki Tuomioja, said "it is only a matter of time" before the "currency straitjacket" eurozone breaks up – eurozone crisis politics
  • The mayor of the Spanish town Alburquerque, Angel Vadillo, is now 2 months into a hunger strike over national cuts to renewable energy subsidies – eurozone crisis politics
  • The World Tourism Organization estimates that 78m Chinese are expected to travel abroad in 2012, making China the world's biggest exporter of tourists for the first time – China
  • Publisher Pearson Group, which owns Penguin Books and the Financial Times, is to enter the education sector by launching Pearson College – education market
  • The Australian Securities & Investments Commission introduced measures requiring traders to have controls on their systems and test them annually to prevent market disruption from automated share trading – "algo" trading
  • Japan's economy grew at a slower-than-expected annualised rate of 1.4% in Q2 2012 due to a drop in consumer spending and the effects of the eurozone crisis – Japan
  • Chinese firm Lenovo, the world's second-largest PC maker, reported a year-for-year 30% rise in profits in the quarter to June, driven by strong sales growth to emerging economies – emerging markets
  • Shares in Manchester United football club began trading on the New York Stock Exchange, closing the opening day at the offer price of $14 per share – Manchester United
  • A survey for online-dating website eHarmony found that 25% of women say that stress over the state of the economy has made them more inclined to seek a long-term relationship, with visits to the dating website highest at times of market turmoil – market crush

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