Bricks and Mortar

Glen Ford spent 20 years working with Tarmac and was Head of Development for its Building Materials Division. He has closely followed trends in the UK housing market for the past 10 years and now heads up HobsonFord Associates and its Market Insights team. In the following commentary Glen summaries his view of the housing market, based on research currently being undertaken for a forthcoming Market Insights report. To request more information about Market Insights, email paul.hobson@hobsonford.co.uk

“In a nutshell, my view is that the housing market will recover quickly this year to the verge of overheating, with strong growth in demand and not enough supply, causing froth in the market and accelerating prices, which will be unsustainable. This will be driven by the effects from a loose monetary policy and an economy that is being propped up by government action. People can't seem to see what might be around the corner.

“The big threat is inflation and public borrowings, and what these will both do to money supply. Both the governor of the Bank of England and the markets have been issuing strong warnings to Alistair Darling for many months to say: “Sort out government borrowings or else money supply will have to do it for you, as it has in Greece, Ireland and Iceland.

“Why is inflation such a threat? At the moment we have a very loose monetary policy, with interest rates at 0.5% and the Bank of England printing money to the equivalent of 14% of national GDP (£200bn QE v GDP of £1,400bn). It’s not quite giving money away on the street, but it induces inflation, as money becomes easier to get. The second factor is public sector borrowing, as this has the same effect as loose money supply. As extra money is pumped into the economy it stokes up inflation, which is why the Bank and the markets are telling the government to get its house in order, or suffer punishment from the money markets in the form of higher sterling lending rates, as foreign investors lose confidence in sterling.

“Keeping the economics to an overview, this means that the housing market - which is highly sensitive to monetary policy because of the high percentage of owner-occupiers - is benefiting from unusual times and times that are not sustainable. Supply will increase this year as builders ramp up activity and homeowners start to put their properties on the market. In a few months time money supply will be squeezed and this will last 2-3 years, dampening demand and for a time causing an excess of supply. This is the pattern we saw in the early 1980s and the 1990s. You get a sudden rush, people think the good times are back, and then the market relapses, before re-establishing itself in due course. We must proceed with caution.

“The key issue that remains a major structural problem is price. The current level is not compatible with high levels of home ownership. Many commentators point to the fact that first-time buyers may borrow money from their parents, but not everyone will - and what happens to those that cannot? The market for rental has to increase. There is a risk that there will be a sharp upwards correction in the cost of borrowing, forced by the money markets, if the government does not deal with the debt issue.

“Have a look at this link - which compares Japan's housing bubble of the 1980s to the situation in USA and UK. The point is this: unsustainable asset bubbles can cause long-term damage and this is one of the risks the UK faces at the moment.”