British House-Buyers Dance With the Devil
What will it take to halt the U.K. housing market? Maybe not the Brexit vote. British builder Persimmon became the latest to challenge the "Brexit is bearish for building" thesis on Tuesday when it said home reservation rates are 17 percent higher since July 1 compared to the same period a year ago. Customer site visits are buoyant too.
To outsiders, this property obsession seems a kind of collective madness. Yes, British house prices are expected to fall 1 percent next year, according to economists at Countrywide, but they believe they'll restart the upward march in 2018. Brits' appetite for houses at inflated prices (see chart below) brings to mind former Citigroup boss Chuck Prince's infamous 2007 assertion that "as long as the music is playing [in terms of liquidity], you've got to get up and dance".
Wavering prospective home-buyers are enticed by ultra-cheap mortgages, bolstered by the Bank of England cutting rates after the Brexit vote. So buying is still often cheaper than renting. And while falling interest rates raise big questions about company pension promises, buying a home at least gives you somewhere to live in retirement.
Persimmon CEO Jeff Fairburn told Bloomberg Television that "people are still very keen to buy and the lenders are keen to lend".
Brits aren't mad, they're just trapped: prisoners of a system that conspires to keep prices high and houses in short supply. They know their government will do almost anything to prevent house prices collapsing. Buyers can already obtain loans from the government to help get on the housing ladder, a policy that will further inflate prices for those lucky enough to own property already. There are reports that Theresa May's government is preparing a fresh multi-billion pound housing stimulus -- albeit one that should support more development.
After the vote to leave the EU, Persimmon shares sank 39 per cent, in line with other house-builders. But it now trades at just a 12 percent discount to the price on the eve of the referendum. Even that seems overdone, given the political will to prop up the sector. As Gadfly noted during the depth of the sell-off, Persimmon doesn't build houses in London (expected to suffer bigger price declines) and its customers are first-time buyers with modest budgets, not wealthy bankers who might flee the capital for Frankfurt or Dublin. And the rest of the country looks far saner in terms of affordability:
Meanwhile, the U.K.'s laborious planning laws mean supply won't overtake demand any time soon. Like its peers, Persimmon is sitting on plenty of cash to take advantage if more land is freed up for development, or to return to shareholders.
Of course, it would be wrong not to look at the longer term. The pound's depreciation, the U.K.'s gaping current account deficit and relentlessly awful productivity say nothing good about the prospects for the economy. If Brexit leads to investment cuts, then jobs will go too. For now, though, British buyers will be compelled to continue their dance with the property market devil.
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