The Trouble with Housing Bubbles

Is there a housing bubble? Since the Brexit referendum the news has been filled with threats about a possible housing crash. Tabloid scaremongering with headlines back in July like “ Britain 'is on the brink of housing price collapse' in the Daily Mail Online, and Britain on 'edge of worst house price collapse since 1990s' in the Sun. Now, however, they seem to be back peddling as the Halifax house price index shows that house prices have not dramatically fallen through the floor.

The house price index shows that in some cities like Leeds and Manchester house prices are still on the up. So, there isn’t one bubble, there are many bubbles, so it is less like one big Lindor and more like an Aero.Or because financial institutions and Governments like stability, more like a Crunchie. These housing bubbles have not exactly burst but now homeowners who have basked in rising prices for years will have to get used to slower rates of growth or maybe even a drop in the value of their home. But a generation of renters faced with increasingly unattainable property prices, when prices are much higher than incomes can afford, will be relieved to see the market cool off so that they can afford to get on the property ladder.

Mortgage lenders rushed to offer lower mortgage rates earlier this year to encourage home ownership.However, there is a lot of speculation that the Bank of England may raise interest rates to curb inflation soon, and this will make it harder for people on variable rate mortgages to repay them. High ownership ratio combined with an increased rate of low Mortgage rates may signal higher debt levels associated with bubbles.

While people are paying high rental prices they cannot also afford to enter an expensive market. At present, many first time buyers are looking to have to save as much as £33,000 just for a deposit, with an average income this just is not possible, certainly not quickly, and this slows the market. There need to be first time buyers to keep the chains alive. When the market stagnates, vendors have no choice but to lower their asking prices. This produces a small scale cycle resembling the fox and rabbit ecology model.

In November 2015 The House of Lords Economic Affairs Committee launched a new inquiry into the economics of the UK housing market. The Committee investigates the supply and affordability of housing across the housing market and reviews the effectiveness of the Government's policies to provide low cost housing to rent and to buy. Lord Hollick, Chairman of the Committee, commented: "There are clearly serious issues with the UK housing market. Across the country, young people in particular are struggling with the cost of housing, whether they are looking to buy or rent. There is an affordability crisis in housing.”

Secretary of State for Communities and Local Government, Sajid Javid, made a statement in the Commons on local housing needs yesterday. Speaking in the House of Commons, Javid said that if lasting change is to be made, a proper understanding of how many homes are needed, and where, is required, and the existing system “is not good enough”. He said a “consistent approach” is a necessity. If we stay with the fox and rabbit model, the Government is trying here to introduce some wild hares.

An ONS study published 4th December 2016 found that 1 in 4 young adults are living with their parents. If cheaper housing stock appears on the market, these boomerang children will be able to afford a place of their own. Parents living in an empty nest are then able to downsize, and therefore make more family properties available.

The Guardian has reported a positive outlook on 12th August. Martin Beck at consultancy Oxford Economics said there was a lack of drivers to push up house price growth but equally an absence of the kind of forces which have typically caused prices to fall. “UK house price growth is running out of steam. And with household incomes squeezed and the affordability of housing stretched, we think a prolonged period of very modest growth lies ahead. But the prospect of a crash is remote,” he said.

Thomas Fisher, an economist at PwC, said: “Factoring in continued pressure on household incomes in the second half of the year, we anticipate a likely weakening in UK house price inflation to around 4pc on average for 2017.”

So maybe these bubbles won’t exactly burst, but like a whoopee cushion, let out a little sigh.


Acknowledgements:
https://www.halifax.co.uk
https://www.pwc.co.uk/
https://www.gov.uk
https://www.theguardian.com
https://www.ons.gov.uk/

The Remains of the Day

Kazuo Ishiguro’s Booker-winning story of unspoken love for anyone who’s ever held their true feelings back, seems to sum up the experience of many Remainers, where these voters were forced into a stubborn silence. Feeling bullied by the Government’s increasingly priapic rush to a Hard Brexit and vilified as Saboteurs and Remoaners; the 48% had their revenge through the ballot box by overturning Theresa May’s majority and returning a well hung parliament. This, it would seem, is the most frequently voiced synopsis of last week’s election; the Remains had their day, but is this really the explanation?


Whilst the Labour Party did pick up a huge number of seats, which had voted to stay in the EU, from the Conservatives, this would not explain the reason for the Phoenix like rise of the Conservatives in Scotland; a part of the UK that had voted to remain in the EU by a very significant margin. Labour too has been crowing about its results in England, but they are also particularly taciturn about their performance in Scotland. It wasn’t just about Brexit.

What then might also have been a significant factor in the election?
Could Big Data help us we asked ourselves? So, we decided we would put our resident boffins to work, to see if HOUSEPRICE.AI could come up with something that might explain these unexpected electoral results. Across England & Wales there were 28 swings to Labour from the Conservatives, the average swing for those parliamentary constituencies was 12.14%, which is historically very large.

CONSTITUENCY MAJORITY SWING
Battersea45.99.1
Bedford46.96.7
Brighton, Kemptown58.319.2
Bristol North West50.616.3
Bury North53.64
Canterbury4520.5
Cardiff North50.111.9
Colne Valley47.712.7
Crewe and Nantwich47.19.4
Croydon Central 52.39.7
Derby North48.512
Enfield, Southgate 51.712.7
Gower49.912.8
High Peak49.714.3
Ipswich47.410.3
Keighley46.58.4
Kensington42.211.1
Lincoln47.98.3
Peterborough 48.1 12.5
Plymouth, Sutton and Devonport 53.4 16.7
Portsmouth South4121.5
Reading East4916
Stockton South48.511.5
Stroud479.3
Vale of Clwyd50.211.9
Warrington South48.49.3
Warwick and Leamington46.711.8
Weaver Vale51.510.1
But this simple table does not tell us much about the 2017 election, what kind of correlations are there between the housing market and the electoral results? £20.77 billion of residential home sales were transacted in these 28 new MP’s constituencies over the last year, with incredibly just two, Battersea and Kensington accounting for more than 30% of that total. There were a total of 62,602 transactions, with an average value of £325,629 and with an average price per square meter of £3,412.60 The chart below shows the percentage swing to Labour from Conservative, vs the price paid per square meter and also showing the aggregate size of transactions in all residential property in that constituency over the last year.
So what can we conclude from this quick analysis?

Battersea also stands out in having many more property transactions than the other constituencies, transacting over 74% more than the average of 2236.

Firstly, overall no surprises that there is no correlation between house prices and political outlook in this sample. The value of a home does not determine its owners political outlook. This will be a boon to pollsters and Labour political canvassers, who can legitimately door knock in Kensington and North Bury with equal hope.
Secondly, Estate Agents in Battersea must be worried about the rise of Internet Agents, 1.5% fees on an average Battersea property of £936,187, equate to fees of over £14,000 and with such a high number of transactions, that looks a sitting duckhouse.