A report for investors by analyst Fred Wellings attacks recent talk of a sustained boom and the “end of the housing cycle”, saying a market correction will come soon. Wellings predicts that the pause will be the result of either a drop in consumer confidence or an interest rate hike to stem “rampant” house price inflation.
“Sooner or later, the froth in the housing market will break,” says the study. “This is not a prediction of a crash – we are not arguing that the market is as overheated as it was in 1972-73 or 1988-89. But there could be an uncomfortable six months or so while the froth is forced out of the market.”
The report challenges a number of proclamations by housebuilders that the recent recovery will continue for the foreseeable future. “There are even some company chairmen writing about the end of the housing cycle … we regard this as wishful thinking,” it says.
Based on a mix of statistical and anecdotal evidence, Wellings cites three reasons why the current boom will come to an end.
First, common sense says that house prices cannot continue to rise at an annual rate of 15-20% when retail price inflation is virtually zero.
Second, national house price to earnings ratios – which measure the cost of houses compared with incomes – are based on broad averages that understate the unsustainability of prices in hotspots such as central London.
Third, commentators tend to compare today’s house price ratios with the 1970s and 1980s. This suggests that houses now are more affordable than they were during, say, the Lawson boom of 1988-89. Wellings argues that this fails to take account of the impact of high inflation during these decades. A better contrast, he says, would be with the low-inflation period between 1955 and 1970; housing was considerably more affordable during this period than it is now.
A source close to Crédit Lyonnais has forecast a parallel drop in the stock market values of housebuilders. In the first half of 1999, housebuilders’ shares rose an average of 60%. The study warns that investor sentiment will be vulnerable to a drop in house sales.
The report is part of Crédit Lyonnais Securities Europe’s Private Housebuilding Annual 1999. It is available from Crédit Lyonnais Library, 0171-588 4000, priced £150, or £50 for House Builders’ Federation members.
HM Land Registry said homes cost an average of 8% more than they did a year ago. The highest rises were in London, where a rise of 12.3% took the average price to £143 725. This compares with a national average of £90 000 and £58 789 in the North and North-east. The North saw the smallest rise, at 3.2%.
