Five Property Warning Signs To Watch

If you're worried about the future direction of house prices, then keep an eye on these five pointers.

How difficult is it to predict the outlook for the housing market and, in particular, future house prices? Well, given the lack of success demonstrated by the biggest forecasters in the housing market, I would argue that it's all but impossible to predict UK house prices even one year ahead with any accuracy!

For example, the housing psychics at the UK's biggest mortgage lender, the Halifax, have done very poorly in recent years, as the following table demonstrates:

Halifax house-price increase predictions, 2002-07

As you can see, the Halifax badly underestimated the strength of the housing market over the past five years. Likewise, so did the UK's biggest building society, Nationwide BS, as shown in the next table:

Nationwide BS house-price increase predictions, 2002-07

As you can see, Nationwide BS hasn't had much luck with predicting house prices either, so it now hedges its bets by estimating a 3% range for future house-price rises, rather than pinning itself down to a precise figure.

In short, from what I've seen in two decades of observing the housing market, almost all mortgage lenders, property firms and housing pundits have dismal records when it comes to predicting future house prices -- including me!

Despite my singular lack of success as 'the Mystic Meg of property', I still keep an eye on a number of demographic, financial and socio-economic factors which are believed to influence demand for housing. In alphabetic order, here are five of the various indicators which I monitor in an attempt to get a feel for the UK property market:

1. House price indices

Although I take house-price predictions with a huge pinch of salt, I do study historical changes to house prices in order to take the temperature of the UK housing market as a whole. However, several different organisations produce house-price indices (you'll find seven listed here), so it's hard to know which index to track!

2. Inflation

The Consumer Prices Index (CPI) is the government's target measure of inflation (which is the tendency of consumer prices to rise over time). Although the CPI doesn't include housing costs, it's still worth keeping an eye on. That's because the Monetary Policy Committee (MPC) of the Bank of England has a target to keep CPI around the 2% mark. When inflation markedly under- or over-shoots this target, the MPC votes to lower or raise the Bank's base rate in order to return CPI to its goal over the medium term.

You can follow the CPI here:
ONS inflation statistics

3. Interest rates

As the CPI measure of inflation has been above its 2% target for quite a while, the Monetary Policy Committee has started raising interest rates. Since last August, the MPC has raised the base rate four times, each time by a quarter-point, increasing the base rate from 4.50% a year to 5.50%.

The next MPC meeting is this week, and as CPI is currently at 2.5%, it's a done deal that the base rate will be hiked to 5.75% on Thursday, in my opinion. Of course, a rising base rate is bad news for homeowners and homebuyers, because it translates into higher mortgage interest rates, which mean higher monthly repayments for borrowers who don't have fixed-rate home loans.

You can follow the Bank of England base rate here:
Bank of England MPC decisions

4. Savings ratio

I like to keep an eye on the savings ratio, which measures the proportion of our take-home pay which we save. Generally speaking, when house prices are rising fast and consumer optimism is high, the savings ratio is low. Conversely, when the future looks tough, we tend to save more as a hedge against upcoming financial difficulty.

As I warned earlier this week in Where Have All The Savers Gone?, the savings ratio has collapsed to a 47-year low of 2.1%, which is just a quarter of its long-term average.

You can follow the savings ratio here:
ONS savings statistics

5. Unemployment

Of course, when people are out of work and struggling to make ends meet, buying property is one of the last things on their minds. On the other hand, when unemployment is low and demand for workers is high, this puts upward pressure on wages, which usually translates into house-price stability or inflation. The unemployment rate has been on the rise since 2004, and presently stands at 5.5% of the 'economically active' workforce, but this is almost half what it was in the recession of the early Nineties.

You can follow the unemployment rate here:
ONS employment statistics

Of course, the factors which impact the housing market don't stop there: I also have consumer confidence, housing transactions, immigration, mortgage lending, wage increases, etc. on my watchlist.

Finally, I've no solid rules on how to weight each of these factors based on its impact on demand for housing. Indeed, I suspect that this task is all but impossible, given the massive scale of the UK housing market and the complex interplay between these variables. Anyway, when all's said and done, demand for housing usually depends more on local factors than national trends, so perhaps forecasting house prices at a national level is nothing more than pointless navel gazing!

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