I note that Lord Keynes has a post up on property prices in the UK in which he says that they’re in a bubble. I’ll get to that in a moment but first I want to show how messy the statistics are.
Lord Keynes uses Steve Keen’s statistics that are taken from the BIS Property Price index. I worked with this index last year as a research assistant and all I can say is that it is a total and complete mess. This is not the BIS’s fault, rather it is due to the size of the database. Frankly, I think the BIS was a little over ambitious putting it together.
To get an idea of how bad this database is let’s take a look at two measures of UK property prices contained within it. In fact the database has a total of five measures but I want to highlight the most inconsistent. (Click for larger image).
As we can see, these two data sets tell very different stories. Exhibit A tells us that property prices have stabilised since they crashed around 2006-2007, while Exhibit B tells us that they are back up to their 2007 peak. Obviously one would draw very different conclusions about the state of the market from each graph.
Now compare these against what I think to what I think to be a far more reliable (and extensive) database, namely the Nationwide House Price Index.
Here we see a story somewhere in the middle: while prices have not quite reached their 2007 peak they are nevertheless very nearly there. Indeed, as we enter the 2nd quarter of 2014 they might well hit that peak. This strikes me as being more realistic than the BIS data.
Using the Nationwide data we can also break down the data by region. This is very, very instructive. I have laid out this data below. (Again, click for larger image)
As we can see, it is the London property market that has bounced back most robustly. Indeed, it has even topped its peak. We also see that the Northern Irish property market — which underwent massive bubble-dynamics and sank completely — is probably more so tied up with the Irish property market than it is with the UK.
So, is there a bubble? This is tough to say. Across the UK I do not think that there is yet evidence of a true bubble. It seems to me that the property prices will have to accelerate a little more before we can say that. But London is a different question altogether. The acceleration of prices that we saw after the crash in London does exhibit bubble-dynamics.
Let me, however, give a potential alternative: what if this isn’t like a typical bubble? In a typical bubble borrowers borrow money and pour it into the market. But when they start to be unable to meet their loan repayments defaults occur, foreclosures follow and prices tank.
But the London property market is being driven by the rich. They seem to be using London property as a safe investment in a volatile, low-yield investment environment (a result of the QE programs). This doesn’t resemble a classic bubble. It seems to me that as long as the rich continue using high-end property as an investment then property prices can continue to climb.
There is, however, another consideration: what about when the people at the bottom of the market get truly priced out of buying? There is then a potential that demand might collapse at this level and lead to a crash. But again, there might be an alternative scenario. What if investors buy these properties and rent them to people at the bottom of the market? What if we see a move away from property ownership and towards a sort of neo-rentier society. Viewing this situation from Ground Zero tells me that it is in no way unlikely.
In short, it is very difficult to make a call on the London property market right now. But if I were someone buying a home I would be very careful indeed and if I were going to take the risk I would do it with my eyes wide open.
Update: I note that there has been some interest in my comment to the effect that what we might be seeing in the property market is a sort of emergence of a new type of rentier class. Someone in the comments section mentioned REITs. Actually one of the things I had in mind are the new rental-backed securities which basically allow hedge funds and the like to generate streams of revenue from home rental in the form of interest payments. These seem to be an extremely safe investment — no major default risk like the old MBS security class — and they will likely prove highly stable. On the other hand, however, they provide a glimpse into a potential future where a disembodied class of rentiers own the homes of the vast majority of the population. Cause for concern, at least.