Market Musings 210522: Housing Slowdown ahead

21st May '22 by Edmund Shing

12 comments 1855 reads

Market Musings 210522: Housing Slowdown ahead

All good things come to an end - the housing market party boom is likely to be ending..

Summary:

Twin motors of the housing market boom: Near-record employment rates and record-low mortgage interest rates
BUT, difficult for employment rates to rise much further: given record-low unemployment, limited EU immigration post-Brexit, rising Bank of England base rates
And mortgage rates are clearly rising, will rise further
Long-term supply-demand driver remains: continuing under-supply of housing in the UK, as in France and in the US. Growing number of single-person/single-parent households boosts demand for housing units.
But affordability becomes a pressing issue, given the combination of rising food/energy inflation and rising financing costs.
Economic slowdown, slowing employment growth and higher mortgage rates to weigh: perhaps no disaster, but stagnation ahead?

This week’s Podcast - Just Keep Buying (for the long term)

Just Keep Buying (link)

Stock market investors should keep a long-term investment horizon, even when stock markets fall.
Time in the market is much more effective than trying to time the market
Stock markets this year have fallen, but that gives an attractive entry point for long-term., patient investors. Remember, markets tend to "climb the wall of worry"
Yes we expect slower economic growth in 2022-23, but judging from history, stock markets can still rise when growth slows.
US individual investor sentiment is already very depressed, at levels only before seen in 1990 and 2009. From such depressed sentiment levels, stock markets have previously rebounded by an average 12% over the next 6 months.
We favour one of: Low Volatility stocks, High Quality Stocks or structured products to limit the exposure to any further stock market falls, while getting upside exposure to any stock market recovery.

Residential house prices have been rampant

House price growth since the first 2020 lockdowns have resembled the 2002-07 period, when UK house prices enjoyed a near-doubling in average house prices. In just over two years, the average house price in the UK has gained 21%. For existing homeowners, this represents a big boost to net household wealth, as housing is by far the biggest single asset most people own.

UK house prices have accelerated post-COVID

Source: Nationwide

Other countries such as France and the US have experienced a similar post-COVID house price acceleration, with US house prices accelerating even faster than in the UK of late.

As in…

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jjis

21st May '22

Fred Harrison who wrote a book on this a while back which has been quite accurate since then. FWIW he seems to think prices may keep going up until about 2025-26 based on his cycle theory. Discussed in the Podcast below.

https://open.spotify.com/episo...

Ponzy Mad-Hoff

The UK housing market was due a correction in 2008 after the GFC but was propped up and inflated further by unprecedented and badly implemented monetary policy. The price of UK housing has generally been determined by the availability and affordability of credit rather than supply and demand so if rates continue to rise and disposable incomes squeezed further then we can expect a significant fall in property prices in real terms. Even a 30% fall in real terms would not make property cheap relative to price history. The big unknown is the policy response as any government will be desperate to protect nominal property prices as failure to do so would cost them the middle England vote.

AnonymousUser1782684

22nd May '22

Thank you Edmund. It’s interesting to note that there remains an ever increasing demand for smaller one/two bed properties.
However, as Ponzy Mad-Hoff commented if people can’t afford to buy the prices will go down even if the demand may remain. But then again, an average mortgage length in Japan, for example, is closer to 35 years. Will this come to the UK too? Maybe.

The Phoenix

Any particular building stocks you favour Edmund ?

Regards

Andy

Jleavett

am I missing something here and have I got this wrong?

The assumption is that employment rates have been rising and rising and this has helped housing market because there are not incomes etc afford more mortgage etc but it can’t rise much more now as it’s near full employment and can’t get higher. Ok. But how can this translate to no longer helping the housing market? If the employment rate stay near full it doesn’t need to grow as long as everyone’s employed. The logic is flawed here. On top of this if there are more vacancies than workers wages will increase. This part of the article just doesn’t make sense. You don’t need employment to be growing once everyone’s employed it just doesn’t need to fall.

bullhead

23rd May '22

Hi Edmund thought provoking piece as always you do seem to have missed the biggest factor in demand for housing in the UK and in particular England which is migration in the 30 years from 1950-1995 the population of UK grew from50 million to just under 58million in the years from 95 to latest estimates 68.5 million

1995 was the year Tony Blair was elected and saw a huge jump in migration we have never seen in this country before

https://www.ons.gov.uk/peoplep...

https://www.migrationwatchuk.o...

https://www.macrotrends.net/co...

Call me old fashioned but excess demand will increase prices

When it comes private rented think we are moving towards firms such as PRS Reit (LON:PRSR) which I own and Grainger (LON:GRI) which I don’t but I find interesting and away from small scale buy to let

Westway001

Yes I think you have missed the point that a recession means rising unemployment but more importantly rising interest rates reduce mortgage affordability which has a direct correlation with house prices.

Edmund Shing

Ah yes Jleavett, but thats the point, it inevitably WILL fall, particularly as economic growth slows sharply.

That is my point; retail is one of several sectors that will see pressure on employment as real retail sales continue to slow on the living cost increases.

Again, just to stress, I am not forecasting anything dramatic like a house price crash, just that it will be harder going in future as some drivers of house price growth reverse.

Edmund

Agreed bullhead,

and that is the big question. Will net migration continue in the post-Brexit era? I would argue that the jury is out for now. But we should recognise that post Brexit, EU nationals do not find it as easy to come to work in the UK, and perhaps do not feel as welcome.

We could see a pick up in non-EU migration to compensate, but this has yet to be seen...

To be honest clarea,

I focus even more on the front end of the supply chain in building, ie building materials. So I like recovery plays in building materials, especially those related to insulation and energy efficiency - so SIG, Sigmaroc, Forterra, Micklemersh Bricks.

But it is true, the yields on those housebuilders look very tempting... Vistry is interesting I think.

Edmund

Thanks for your reply Edmond but their was more immigration in the period I mentioned from outside the EU than from it

For instance if you look at the figures in migration watch in the year ending March 2020 migration into UK from outside was twice that from the EU

An ever expanding population based on importing low wage earners is not beneficial to the existing population in the long term in my opinion

Market Musings 210522: Housing Slowdown ahead