Podcast Summary
House prices falling despite inflation-adjusted increase: Despite nominal decreases, house prices have fallen by 8% YoY when adjusted for inflation. Predicted to fall further by 8% in nominal terms in 2023, returning to April 2021 levels.
House prices, particularly in the UK, have seen a significant increase during the pandemic, but have since started to decline. The latest data shows an average decrease of around 1.5% month on month and 4.3% since the peak in August 2022. However, it's important to note that these figures are in nominal terms. When adjusted for inflation, house prices have actually fallen by around 8% year on year. The Halifax, a leading housing market researcher, predicts a further fall of around 8% in nominal terms across 2023. Despite these projected falls, they note that this would only take house prices back to their April 2021 levels due to the massive run-up in prices. The decline in house prices is linked to high inflation, weaker growth, and the winding down of government stimulus schemes. Additionally, the broad money supply (M2) has started to fall for the first time in decades, and credit availability is decreasing along with higher interest rates. These economic factors are contributing to the decline in house prices.
UK Housing Market Faces Challenges from Multiple Angles: The UK housing market is experiencing a correction due to rising mortgage costs, economic downturn, and reduced spending power. Banks face increased counterparty risk as interest rates impact swap rates and house prices fall.
The UK housing market is experiencing a correction due to several factors, primarily the increase in mortgage costs and the economic downturn caused by inflation and the cost of living crisis. The cost of mortgages has risen due to the Bank of England's mortgage approval data falling 20% between October and November, and the increase in interest rates. However, it's not the interest rates themselves that drive mortgage rates, but rather the swap rates, which have spiked and fallen based on market conditions. This means that banks, which have been taking on minimal interest rate risk through interest rate swaps, are now facing increased counterparty risk as house prices begin to fall. Additionally, the cost of living crisis and inflation have reduced people's spending power, making it more difficult for them to afford mortgages. The question now is how far house prices will fall, with the level of interest rates being a significant factor. Overall, the housing market is facing challenges from multiple angles, and the situation is causing concern for banks that have been relying on collateralized loans.
Mortgage rates decreasing due to 'moron premium' dissipation: Mortgage rates dropping, but still high; house prices declining; banks lowering rates for strong borrowers; house price to income ratio expected to decrease; 5% may be new normal for mortgage rates
Mortgage rates have started to decrease despite the Bank of England continuing to increase interest rates due to the dissipation of the "moron premium" caused by the mini-budget. However, mortgage rates are still significantly higher than they were a year ago, and house prices have begun to decline as a result. Banks are trying to prevent a surge in repossessions by reducing mortgage rates for those with strong loan-to-value ratios. The house price to income ratio, which is at record highs, is expected to drift downward slowly, indicating that house prices may fall by around 1% per year. Ultimately, 5% may become the new normal for mortgage rates.
UK Housing Market: 3-Year Growth Uncertainty: The UK housing market's future growth could range from a 7% annual increase to a 7% annual decline, with the central case suggesting flat growth. Factors such as income growth, inflation, and price-to-income ratios will influence the market's trajectory.
The UK housing market's future trajectory is uncertain, with potential outcomes ranging from a 7% annual growth to a 7% annual decline over a three-year period. The central case suggests a flat growth of 0.7% in nominal terms, but without inflation adjustment. The pessimistic scenario, which assumes income shrinkage and mean-reverting price-to-income ratios, could lead to a 21% decline. Conversely, an optimistic case with sharp income growth and rising price-to-income ratios could result in a 7% annual increase. The speaker's personal belief leans towards the bearish case due to the cost-of-living crisis and higher interest rates. However, a significant economic shock or crisis might accelerate the downward trend, which some people might view as a positive development for those priced out of the housing market. Historically, the deepest drawdowns in the UK housing market occurred in the early 1990s (20% decline over 8 years) and 2008-2014 (19% decline in under 7 years). The US experienced a 30% decline during the deflationary period of 1926-1944, and a 27% decline from 2006 to 2017. While the UK hasn't experienced a significant drawdown since the 1990s, the future remains uncertain.
The complexities of housing market and house prices: Focus on increasing housing supply for affordable prices, consider the stability provided by a large housing market, and understand the potential consequences of changes in house prices.
The obsession with high house prices and the belief that lower house prices are inherently negative for the economy may not be entirely accurate. While it's true that a significant portion of young people's savings go towards buying a house instead of starting businesses or investing in productive assets, a large housing market can also provide stability, especially for those who own their homes outright. However, it's important to remember that a decrease in house prices can have negative effects, such as a reduction in consumer spending due to a perceived decrease in wealth. The key is to focus on increasing the supply of good quality homes to bring down prices in a productive way. Additionally, the UK's housing market is disproportionately large compared to its stock market, and a large number of people own their homes outright, providing stability in an era of rising interest rates. Ultimately, it's crucial to consider the complexities of the housing market and the potential consequences of changes in house prices.
The affordability crisis in housing markets and its psychological and macroeconomic implications: Rising house prices can lead to unsustainable debt and distress for homebuyers, making it difficult for young people to enter the market, and potentially indicating an economic downturn. Policymakers must address housing affordability for economic stability and homeowner well-being.
The affordability crisis in housing markets, particularly in cities, can have significant psychological and macroeconomic implications. When house prices rise rapidly, it can lead to unsustainable debt for some homebuyers, leaving them feeling trapped and distressed. At the same time, high house prices can make it difficult for young people to enter the market, leading to a slower construction sector and a ripple effect on related industries. Moreover, when house prices fall, it can indicate a potential economic downturn. This was evident in various countries, including the UK, Canada, Australia, and parts of Europe, where house prices skyrocketed between 2019 and 2021. Central bank officials in some of these countries have expressed concern about the situation, warning of potential economic volatility. Therefore, it is crucial for policymakers to address housing affordability to ensure economic stability and psychological well-being for homeowners.
Housing markets with high variable rate mortgages and household debt are sensitive to interest rate hikes: Countries with high variable rate mortgages and household debt have more volatile housing markets when interest rates rise
Housing markets with a higher proportion of variable rate mortgages and higher household debt to income ratios are more sensitive to interest rate hikes and therefore more likely to experience significant declines in housing prices. This was highlighted in the discussion using Sweden as a case study, where 80% of homeowners with mortgages have variable rates and the household debt to disposable income ratio is around 200%. Central banks face a challenging situation as they must talk up the economy while also tightening monetary policy. However, the impact on housing markets can be politically sensitive due to the large number of homeowners with mortgages, particularly in countries like Sweden where mortgage holders tend to be wealthier and more likely to vote. Countries with a larger percentage of fixed rate mortgages, such as the US and New Zealand, may experience a more gradual impact from interest rate hikes. Ultimately, the structure of the housing market, including the percentage of the population with mortgages, the proportion of variable rate loans, and household debt levels, all play a role in determining which markets will be most affected by interest rate changes.
Mortgage dominance: Central banks' fear of over-borrowed homeowners: Central banks could face constraints in raising interest rates due to over-borrowed homeowners' fear of mortgage debt, potentially impacting monetary policy and the economy.
The fear of mortgage debt among the over-borrowed middle classes could constrain monetary policy, creating a form of "mortgage dominance." This concept is similar to fiscal dominance, where a government's borrowing levels may prevent a central bank from raising interest rates due to increased debt servicing costs or political pressure. If inflation persists at high levels, central banks might hesitate to raise rates to avoid bankrupting a significant portion of the population. The UK's high homeownership rate may allow central banks to maintain higher interest rates for an extended period. However, the buy-to-let sector, with its high loan-to-value ratios and interest-only mortgages, could be particularly vulnerable to forced sales in a housing market crash. Ultimately, this discussion highlights the potential impact of housing and mortgage markets on monetary policy and the economy as a whole.
A house as an asset and a liability: From a cash flow perspective, owning a house can be seen as paying rent to yourself, but it still involves negative physical cash flows.
A house can be seen as both an asset and a liability, depending on how you look at it. On one hand, it generates costs such as maintenance, services, taxes, and financing. On the other hand, it can be considered an asset as it is a primary source of wealth for many people. From a cash flow perspective, owning a house means effectively paying rent to yourself, which can be seen as an untaxed income. However, the physical cash flows are still negative. While some argue that owning a house makes you neutral in the housing market, others believe it's a fake argument since you can make similar arguments about other necessities like food. Ultimately, the decision to buy a house should be based on individual circumstances and financial goals.
Is owning a house a good investment?: Despite popular belief, houses may not be a good investment due to resource intensive nature, underutilization, illiquidity, high transaction costs, and lower returns compared to equities.
Despite the common belief that owning a house is a good investment, it may not always be the case. The housing market, particularly in terms of homeownership and construction, has not seen the same level of innovation as other sectors, such as technology. Houses require a significant amount of resources and are often underutilized, with many appliances and spaces sitting idle. Moreover, houses are illiquid, have high transaction costs, are undiversified, and their returns are generally lower than equities. The feeling of FOMO (Fear of Missing Out) when house prices rise can lead people to believe they're missing out on a great investment, but the long-term data shows that equities have outperformed housing prices for a long time. The ability to access large amounts of leverage in a rising housing market can make it seem like a good investment, but this comes with risks. Overall, it's essential to consider the limitations and potential drawbacks of investing in real estate, particularly in the form of owning a house.
Understanding the financial implications of buying a house: Buying a house is more than just an investment, it's a place to call home. Consider the financial implications, including opportunity cost, when making your decision.
While a house can be considered an investment if you rent it out, it's not typically the primary reason people buy a house as a home. However, it's essential to understand the financial implications of buying a house, as it can significantly impact your investment capacity due to the large amount of capital required for a down payment and ongoing mortgage payments. The speaker argues against viewing a house as an investment in the same way as stocks or bonds, as it serves a different purpose, fulfilling our need for shelter and providing a sense of pride and comfort. Yet, it's crucial to consider the financial aspects, such as the opportunity cost of the capital tied up in the house, and how it might affect your ability to invest in other areas. Overall, while a house is not an investment in the traditional sense, it's essential to be aware of its financial implications.
