House price news shakes May’s economy

IT WAS BAD NEWS for Theresa May this morning as figures from two sources hinted that all is not well with house prices – which could be an early sign that the economy is far from healthy.

House prices are important because they tie up a large part of the nation’s capital and because they represent a large part of the nation’s personal debt.
•If house prices are rising, domestic mortgages represent a decreasing proportion of the overall value of housing – so the personal debt does not shoot up.
•If house prices do not rise, the proportion of the value of housing which is held as personal debt stays stable too – which is not good news if the Government is trying to encourage householders to increase their personal spending.
•And once house prices remain stable, they are only one step away from declining – leading to the horror scenarios of negative equity, mortgage defaults and an economic crash to correct the over-valuation of the nation’s assets. It was this scenario (in the USA) that triggered the global recession of 2008, from which the west has still not recovered. There is also a tremendous human cost to a flood of negative equity.

The first news that came in today was a report from the Halifax on house price trends, which revealed two important sets of figures.

•Over the last three months (February, March and April) house prices fell by 0.2%, with half of that decline occurring in April. This is the first time figures for a three month period have fallen since November 2012.
This news was slightly balanced out by figures which showed that over the last year as a whole (May 2016 to April 2017 inclusive), house prices rose by 3.8%. This is the same rate as applied to the year ending March 2017 – indicating that price rises were flatlining.
The Halifax attributed the annual stagnation and quarterly fall in house prices to the high cost of buying property. Their figures confirm the general findings of a report issued last week by mortgage lender Nationwide, which said that the annual rate of increase in house prices was the lowest for four years.

•The second news came from the Bank of England, which announced that the number of mortgages being approved fell last month – the second month running. The Bank attributed the fall, which reflects a slowdown in house sales, to the lack of growth in wages and salaries. In other words, fewer people can afford to buy a home.
Other economic commentators agreed with this general analysis, also suggesting that the continuing lack of supply of housing would keep prices buoyant. Unless there is a real boost in incomes – which is highly unlikely, especially in the next couple of  years – this may continue, with lenders trying to keep interest rates low and introducing other special offers and gimmicks to try to tempt uneasy purchasers into the housing market. That’s a very tight tightrope to walk for any significant length of time.

The picture around the country is very patchy, with the highest prices in areas where there is more opportunity for employment. With Brexit likely to delay domestic investment in employment for some years, the picture for the economy – not to mention those needing an affordable home – looks very gloomy. Ms May must be very thankful that she called the General Election before depressing economic news like this came out too often.

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