House prices, like the stock market, are tricky to predict.
As with the stock market, there are two classes of parameters that affect the prices – the so-called ‘fundamentals’, like supply and demand, the price-to-earnings ratio on the one hand, and the more transient effects like the economic climate and the ever-slippery ‘confidence’.
There has been feverish speculation for years in the UK, and the prices rose for 15 consecutive years, and are at last dropping.
So why did the prices get so high? Many economists would argue it was a classic “bubble”, a self-perpetuating cycle of confidence building more confidence; in other words the fundamentals were being ignored.
Of course, the people found fundamentals they claimed justified the prices; in particular increased demand. Folks living longer, divorce, folks marrying later, immigration, and the breakdown of the family unit; all these things mean we need more houses.
But if these fundamentals were the whole reason, the prices wouldn’t be dropping as they are now. OK, so now most will admit it got out of hand and this is a correction. But how far has it got to correct?
The bubble, it seems to be agreed, was really helped by two factors:
Firstly there was a throttle on the supply – planning permission is notoriously hard to get and the government probably knew it and were happy with prices rising, it made everyone feel prosperous. On a more sinister front, housing developers may have sitting on prime real estate to deliberately keep prices high.
Secondly, there was easy credit – anyone and their dog could get the cash so people who really shouldn’t have been in the game got in and are now out of their league.
But there is a third factor I’ve not seem discussed in the media: the baby-boom generation.
Hasn’t this bubble coincided with the baby-boomer’s ‘rich’ phase – the age from 45-60 when the kids are off and 25 years of mortgage payments have built up the asset list? Surely this is the age-group that is most likely to own big houses, or multiple houses for that matter?
So what will happen now? The bubble has burst, the correction is in full swing, but what will happen in the next 10 years as the baby boomers start retiring, downsizing, and dying? Will this coincide with the next bubble-burst? Will the industry and government look at the population age profile during planning?
I personally hope this is why the market is cock-eyed – why it is that a professional engineer in his mid-thirties with a internationally comparable salary can’t afford more than a mid-terrace house with a 5×5-metre garden…
So I predict (well pray really, if that’s possible for athiests) that we will get into an oversupply situation and that house prices should correct from this ‘second-order’ bubble.
Of course, even if I am right, it may be that the prices are kept up by nasty developers identifying whole towns to ‘let go to ruin’ just to keep the prices high in the next town along…