Can Britain cope with a fall in house prices?

Uhoh: a man browses in an estate agent window. Image: Getty.

Britain is locked in a seemingly constant battle with the burden of its overheated housing market. Theresa May has announced measures at the Conservative Party conference designed, at the very least, to dampen criticism over a lack of housing and ever-increasing prices.

It is unclear for now just what impact May’s announcement for land releases and an extra £2bnn for affordable housing may have. After all, the UK’s housing stock is valued at close to £7trn. But her announcement comes after London real estate prices registered their biggest fall in a decade, stoking expectations for further drops in real estate prices.

So what would falling house prices mean for Britain? How might it affect employment, household consumption, investment, the government deficit and, critically, the UK current account – the net measure of cash flows in and out of the economy.

The greater fool

Brexit and associated uncertainty about the future of the UK financial sector are making real estate investors, home buyers and households more cautious. One of the things that has fuelled London real-estate prices over the years is the “greater fool” mechanism. Buyers knew that a property was expensive, and perhaps ridiculously expensive, but they counted on the fact that they could sell it later to a “greater fool” at an even higher price, for a handsome profit.

That phenomenon was perhaps best displayed in the first recorded crisis in free markets. Tulip mania in 17th century Holland built to a crescendo which saw single, rare tulip bulbs change hands for extraordinary sums. Historian Mike Dash has described it as enough to “purchase one of the grandest homes on the most fashionable canal in Amsterdam for cash, complete with a coach house and an 80 foot garden”.

As tulip mania went on to show, however, if prices show indications of a fall, the upward trend reverses violently. If property investors become skittish, they will try to sell before prices fall further, and all of them at the same time. Property values built over decades could collapse within months: the expectation of falling prices causes the falling prices.

This mechanism is a real danger in London which relies heavily on local and international investors who view properties not as a home but as a commodity, readily sold to maximise profit. In 2013 alone, international investors accounted for 82 per cent of London property activity.

Falling for it

However, most properties in the UK still belong to households. Families, by and large, don’t need to sell. So what would falling property prices mean for them?

First, many pension funds and investment bonds rely on UK property to generate income for their beneficiaries. Second, we have what economists call the Wealth Effect.

Economists have long associated consumers’ perceived real estate wealth with spending behaviour: if you believe your house is worth a lot, you feel financially secure. And then you allow yourself to save less and spend more. Just consider the rising number of people who plan to subsidise their retirement with wealth generated by their homes.

If their assumed valuations start to look shaky, these people will spend less to build up their savings. The pain would be felt by many: about 64 per cent of households in England are owner-occupiers.

The Wealth Effect is important in most developed economies but even more so in the UK which relies on ever-rising levels of consumer spending for its growth. A 10 per cent fall in the value of dwellings in the UK would correspond to a loss of wealth equivalent to more than the value of all the cars exported from the UK in a decade.


Ripple effects

The climate of economic uncertainty, reduced consumption and falling real estate values brings an additional problem for the UK. Britain has long had a trade deficit, but it has also benefited from positive foreign direct investment.

The Current Account itself has been in the red for nearly 20 years now but the hundreds of billions of inward foreign investment channelled to UK property over the same period meant that this deficit remained manageable – just about.

According to the Bank of England, overseas companies have accounted for roughly half of all UK commercial real estate transactions since 2013. If international investors expect prices to fall in any sustained way, the inflow of money would stop and many would sell up. Why buy or hold an asset just at the start of what might be a long decline?

This would not only put pressure on real estate prices but would affect UK GDP, reduce government revenues and worsen the UK Current Account position. The credit rating of the UK would come under more pressure, and trillions of UK government debt would cost more to refinance. Then the UK government deficit would deteriorate further, taxes might rise to cover for this and the domino effect would be in full cry, spreading to all sectors of the economy, similar to events in Greece.

Policy plays

Real estate values are critical to the UK’s prosperity. Households, pension funds and businesses have invested heavily; most of the country has, in one way or another, skin in this game. Britain may need to wean itself of its property addiction, but it also needs to sustain confidence in the single asset class that counts for almost two thirds of its wealth.

It is deeply difficult politically to sell that story, however, when the understandable clamour is to make housing more affordable. In a move designed to win over younger voters, May has imposed punitive taxation on landlords, cutting one of the life-lines of UK real estate and driving many out of the market. The new measures announced at the Conservative party conference apply further pressure.

May is desperate for a positive message but the implications of targetting the real estate market right now are huge. Britain’s Brexit fumbling is already failing to inspire confidence. The fear has always been that Brexit would spark a period of stagnation, but the danger of deeper, more accelerated damage now seems real, and the potential effect on property values and the economy stark.

The ConversationThe UK government should act decisively. This would require the continuation of loose monetary policy, a reinstatement of tax incentives for real estate investment and, of course, a real plan for Brexit and the future of London’s financial services industry.

Alexander Tziamalis is a senior lecturer and associate professor in economics at Sheffield Hallam University.

This article was originally published on The Conversation. Read the original article.

 
 
 
 

Barnet council has decided a name for its new mainline station. Exciting!

Artist's impression of the new Brent Cross. Image: Hammerson.

I’ve ranted before about the horror of naming stations after the lines that they’re served by (screw you, City Thameslink). So, keeping things in perspective as ever, I’ve been quietly dreading the opening of the proposed new station in north London which has been going by the name of Brent Cross Thameslink.

I’ve been cheered, then, by the news that station wouldn’t be called that at all, but will instead go by the much better name Brent Cross West. It’s hardly the cancellation of Brexit, I’ll grant, but in 2017 I’ll take my relief wherever I can find it.

Some background on this. When the Brent Cross shopping centre opened besides the A406 North Circular Road in 1976, it was only the third large shopping mall to arrive in Britain, and the first in London. (The Elephant & Castle one was earlier, but smaller.) Four decades later, though, it’s decidedly titchy compared to newer, shinier malls such as those thrown up by Westfield – so for some years now, its owners, Hammerson, have wanted to extend the place.

That, through the vagaries of the planning process, got folded into a much bigger regeneration scheme, known as Brent Cross Cricklewood (because, basically, it extends that far). A new bigger shopping centre will be connected, via a green bridge over the A406, to another site to the south. There you’ll find a whole new town centre, 200 more shops, four parks, 4m square feet of offices space and 7,500 homes.

This is all obviously tremendously exciting, if you’re into shops and homes and offices and not into depressing, car-based industrial wastelands, which is what the area largely consists of at the moment.

The Brent Cross site. Image: Google.

One element of the new development is the new station, which’ll sit between Hendon and Cricklewood on the Thameslink route. New stations are almost as exciting as new shops/homes/offices, so on balance I'm pro.

What I’ve not been pro is the name. For a long time, the proposed station has been colloquially referred to as Brent Cross Thameslink, which annoys me for two reasons:

1) Route names make rubbish modifiers because what if the route name changes? And:

2) It’s confusing, because it’s nearly a mile from Brent Cross tube station. West Hampstead Thameslink (euch), by contrast, is right next to West Hampstead tube.

Various other names have been proposed for the station. In one newsletter, it was Brent Cross Parkway; on Wikipedia, it’s currently Brent Cross South, apparently through confusion about the name of the new town centre development.

This week, though, Barnet council quietly confirmed it’d be Brent Cross West:

Whilst the marketing and branding of BXS needs to be developed further, all parties agree that the station name should build upon the Brent Cross identity already established. Given the station is located to the west of Brent Cross, it is considered that the station should be named Brent Cross West. Network Rail have confirmed that this name is acceptable for operational purposes. Consequently, the Committee is asked to approve that the new station be named Brent Cross West.

Where the new station will appear on the map, marked by a silly red arrow. Image: TfL.

That will introduce another irritating anomaly to the map, giving the impression that the existing Brent Cross station is somehow more central than the new one, when in fact they’re either side of the development. And so:

Consideration has also been given as to whether to pursue a name change for the tube station from “Brent Cross” to “Brent Cross East”.

Which would sort of make sense, wouldn’t it? But alas:

However owing to the very high cost of changing maps and signage London-wide this is not currently being pursued.

This is probably for the best. Only a handful of tube stations have been renamed since 1950: the last was Shepherd’s Bush Market, which was until 2008 was simply Shepherd's Bush, despite being quite a long way from the Shepherd's Bush station on the Central line. That, to me, suggests that one of the two Bethnal Green stations might be a more plausible candidate for an early rename.


At any rate: it seems unlikely that TfL will be renaming its Brent Cross station to encourage more people to use the new national rail one any time soon. But at least it won’t be Brent Cross Thameslink.

Jonn Elledge is the editor of CityMetric. He is on Twitter as @jonnelledge and also has a Facebook page now for some reason. 

Want more of this stuff? Follow CityMetric on Twitter or Facebook