Houses of cards

The doom and gloomsters in the UK media are having a field day with the July house prices report from the Royal Institute of Chartered Surveyors (RICS), which in the headline writers' interpretation shows that house prices fell in the month for the first time in a year. Actually, that's not what the survey says. This is one of those rather dodgy statistics in which respondents are asked what they think is happening, rather than anyone taking the trouble actually to measure what is happening; the risible monthly survey by the ever-shrill but rarely correct British Retail Consortium is another such.

What the RICS does is to ask a small sample of estate agents (fewer than 300 -- I think we have more than that in my town alone!) whether in the past month they have seen prices falling, rising or staying the same. The balance between those reporting rising and falling prices becomes the headline figure. (If you care, this sort of measure is called a "diffusion index"). In July 64% of the RICS's respondents saw no change in prices, with 11% seeing increases and 25% seeing falls. So the overall picture is slightly negative, though given the preponderance of "no change" readings, not unduly so -- which of course could never stop the doom mongers.

To be fair to the RICS, their own press release (you can read it here) is scrupulously balanced. They note that despite the small negative reading for July, most estate agents continue to look for some increase in house prices over the remainder of the year. While acknowledging that fears over the impact of public spending cuts and continuing restrictions on the availability of mortgage finance may be starting to weigh on the market, they suggest that the proximate cause of the fall in July may have been an increase in the supply of home son the market, as a result of the abolition of the ill-fated HIPs programme.

Many in the media, of course, want to believe otherwise, pointing the finger instead at the nasty banks and their unwillingness to open the lending taps again. One of the Sunday money supplements this past weekend used as a case study a young lady of 22, implausibly described as a "legal executive", who had been turned down for a mortgage because she had only a 10% deposit.

By implication, it's wrong for a bank to refuse to give someone with at best a short credit history and a small downpayment a loan equal to several times her annual salary. Funny, I thought it was exactly that kind of "Hail Mary" lending that got banks all around the world into so much trouble a couple of years back.

The former head of the FSA, Lord Turner, recently presented a remarkable paper in which he pointed out that well over 70% of lending by UK banks goes into either residential or commercial property. Even more surprising than the raw figure is the fact that very little of this goes into financing new development. It's almost all used for refinancing of existing properties. The clear implication of this is that the rising price of residential property in the UK for most of the past two decades had very little to do with supply and demand, and almost everything to do with the blind willingness of banks to lend against it. (I think this is an example of what George Soros has been trying to get at with his tortuous "reflexivity" theory).

Unless you think house prices are back to an equilibrium level of some sort (and if you do think that, you're pretty much on your own), it's hard to see how they can go much higher without a return to irresponsible lending by the banks. If we have a choice between a stagnant housing market and wobbly banks, I know which I'd prefer.