UK house prices, the case of a too big to fail market.

I've seen a few housing bubbles and it took me a while to realise and see that conventional economic thinking when applied to house prices simply doesn't work, at least not in the UK. In part it isn't allowed to work because the UK housing market isn't a truly free market. It tends to be free when prices are going up, but as soon as price rises start to hit a blip then we get intervention, the strong vested interests of the housing industry start knocking on the door of Government asking what are they going to do about it.

Traditional free market theory tells us that Government should do nothing, markets should be allowed to correct, but the UK housing market has become a "too big to fail" market.  Too big to fail because of the knock on effect of the fall out on both the financial and general economy that would come from any correction.

First, any significant fall in house prices would hit the already under pressure UK banks. These are the same banks that are largely responsible for the problem in the first place as they relaxed their lending criteria and lived the good life on the back of the mortgage credit boom pre-2008. Given their ongoing potential liabilities, falling house prices would only make things worse.

Second, UK property owners have increasingly seen their wealth as being in property. The growth of home ownership since the early 1980's has been seen as much as an investment as somewhere to live and call your own home. The UK obsession with property and rising or falling house prices has a political impact in that politicians know that these people are more likely to be older and vote. Any Government risks the wrath of the electorate and losing votes on the back of any fall in house prices.

Third, it should also be remembered that politicians themselves are usually personally invested in property, quite a few have their own property empires as the expenses scandal of a few years ago showed. It is not in their own interest to see falling prices.

So, Government and Central Banks tends to intervene because choosing not to has a free market consequence that is dangerous to the whole economy. If banks go under credit would dry up, businesses would go to the wall, spending would fall, recession, potential depression would be on the cards.


Unfortunately, as Government has become disinclined to allow the free market to sort things out, their intervention is always dressed up as help, usually in the form of helping those priced out at the bottom of the housing market ladder. This "help" is usually in the form of one scheme or another which in reality acts as a prop to prices, but in itself simply adds to the problem. It adds to the problem because like all investments that get ahead of themselves, further price increases simply add to the bubble. With property this means that price gets further away from what people can afford by traditional means, 2-3 times salary, 5% deposit, etc and often results in a more relaxed attitude to lending, potential fraud, Government loans, etc. It has become a vicious circle, but one that has its own powerful reality.

Chances are that if you are priced out of the market and waiting for IR's to go up so that prices will fall, traditional economic thinking, you could be waiting a long time and the likelihood is it won't happen. This is a lesson that since 2008 should have been learnt, Government and Central Bank will do what they see as necessary to prop up prices and avoid the potential for crash at just about any cost.

So, here we are still in a war fighting against austerity, but a boom attitude about house prices prevails and the Government stepped in big time at the last budget to do their bit.

Britain's property market is a "win-win" scenario in 2013, the influential Ernst & Young Item Club said in its spring forecast today.

It said incomes would edge higher, largely thanks to the rise in the personal tax allowance for most Britons, and predicted that mortgage affordability would improve, with the impact "multiplied" by the Chancellor's new Help to Buy scheme.

The first phase of the Help to Buy scheme began earlier this month. The Item Club, an independent group of economists, said that with £3.5bn of government funds paying 20pc of the purchase price, the scheme could underpin 100,000 mortgages worth £200,000 each.

The report stated: "We think one million families will move house in the coming year, a sharp increase from the recent level of 800,000, driving higher house prices, additional housing-related spending, and ultimately construction."  

http://www.telegraph.co.uk/finance/personalfinance/houseprices/9994827/Win-win-for-house-prices-as-1m-prepare-to-buy-says-Ernst-and-Young-Item-Club.html

This is good news for the likes of Taylor Wimpey, Barratt Development and Redrow, etc. One way to play this game may well be to invest in the construction companies that will benefit from the Government decision to prop up prices with the Help to Buy scheme, as it is difficult to see how they cannot fail to make money on the back of this intervention.

And if you are priced out then surely it makes sense to take the Government money and buy? History shows us that they will defend the indefensible when things go wrong as happened in 2008. Principles and honesty are put to one side, the risk takers and fraudsters are rescued, surely one lesson of recent times is it doesn't pay to stick to your guns and hope that one day traditional economic thinking will be allowed to have its way, house prices will fall and you will be able to afford to buy in a free market way? That free market in house prices, especially when they look like falling, doesn't exist.