| | | United Kingdom: Putting the Housing Bubble into Perspective
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[摘要] uk house price inflation has outstripped expectations for some time now, with prices up 9.8% year on year in february on the odpm index and 18.5% in march on the halifax index. even if one factors in the solid economic recovery and last years interest-rate cuts, it is difficult to rationalize this surge purely with economic fundamentals. most people would agree that this must be a bubble, reminiscent of the late 1980s or the equity bubble in the late 1990s. however, it is far less clear by how much house prices have overshot, when (and if) the bust will come and, if it happens, what form the correction will take.
uk house price inflation has outstripped expectations for some time now, with prices up 9.8% year on year in february on the odpm index and 18.5% in march on the halifax index. even if one factors in the solid economic recovery and last years interest-rate cuts, it is difficult to rationalize this surge purely with economic fundamentals. most people would agree that this must be a bubble, reminiscent of the late 1980s or the equity bubble in the late 1990s. however, it is far less clear by how much house prices have overshot, when (and if) the bust will come and, if it happens, what form the correction will take. furthermore, would a house-price bust necessarily cause an economic slump along the lines of the early 1990s? we think not.
comparing house prices with fundamentals ... to assess the approximate size of the uk house-price bubble, we created an econometric model linking the equilibrium level of (real) house prices to three fundamental variables. these are: real disposable income per household; the number of dwellings per capita (a measure of structural demand/supply pressures); and the yield curve, expressed as the difference between long bond yields and short rates. the latter variable is included to capture the shift to a more credible monetary and fiscal policy regime in the mid 1990s, which, through the reduction of long-term uncertainty about the macro-environment, should have raised the equilibrium demand for housing as an investment asset. as expected, we find that rising incomes per household, as well as a flattening of the yield curve (indicating a move to a more stable macro-environment), have tended to push equilibrium house prices higher over time, while a rise in the ratio of dwellings to population pushed house prices lower. interestingly, we did not find a significant role for (real or nominal) interest rates in explaining the long-run evolution of house prices, once all the other factors above are accounted for . however, changes in real interest rates do appear to play a (limited) role in explaining the shorter-run dynamics of house price inflation.
... suggests that it is indeed a bubble ... comparing the actual level of house prices with the equilibrium level estimated by our model indicates a 30% overvaluation at the end of 2003. on our model, house prices are now even more overvalued relative to fundamentals than at the peak of the boom of the late 1980s. the current bubble only started to develop during 2002 and worsened in 2003, whereas the house-price rises from 1995 to 2001 reflected largely a rise in equilibrium house prices due to improving fundamentals. given the extent of the overvaluation suggested by our model, there must be a high probability of a correction over the next couple of years.
... but house prices will not necessarily crash however, since valuation is not usually a good guide to near-term market direction, it is impossible to say when the correction will occur, and from what level of prices. nor is it possible to predict how far and fast prices will fall. in our view, it is unclear that prices will fall sharply at all — they might unwind gradually instead, for two reasons.
equilibrium house prices could drift higher first, the overvaluation might be reversed, not through a drop in actual house prices, but through a further improvement in the fundamentals that drive the equilibrium house price in our model. most importantly, decent growth in real disposable incomes on the back of a pick-up in real earnings and further employment growth would warrant a higher equilibrium price of homes over time. however, given the size of the current gap between actual and equilibrium prices, it would take a long time for the equilibrium price to catch up with current house price levels. according to our estimates, real disposable incomes would have to rise by 3% annually over the next five years to do the trick.
no trigger for a sudden fall second, typically, it takes a trigger for a house-price boom to turn into a bust. the two obvious ones are a recession and sharp interest-rate rises. both helped bring down the housing market in the last bust. yet neither of these is on the horizon in the current environment. the economy is far from overheating, with the output gap roughly closed this year and no sign of any significant wage or consumer price pressures. moreover, the bank of england is treading cautiously in raising interest rates, unlike the aggressive rate hikes implemented in the last boom-bust episode. thus, absent any triggers, the current housing boom could well end not with a bang but with a whimper, with house prices slowing rather than falling sharply. note that this is what has happened in the netherlands over the past few years, where house-price inflation has gradually eased from around 20% in 2000 to flat to rising more recently. also, in australia, house-price inflation has simply stagnated at double-digit levels over the past two years. thus, even though uk house prices are clearly overvalued, a bust is not inevitable.
economy could withstand house-price correction moreover, even if house prices drop sharply, this does not necessarily imply that the economy would suffer badly. first, the surge in house prices has not been accompanied by exuberant consumer spending. rather, consumer spending growth has slowed from the heady pace of 2000, and the household savings rate rose during 2003. so, as consumers do not appear to have overextended themselves to the extent that they did in the late 1980s, a drop in house prices would probably not necessitate a sharp adjustment in spending.
bank would stand ready to ease second, and more importantly, any sharp drop in house prices that threatened consumer spending would be likely to cause the bank of england to lower interest rates to contain the damage. with consumer price inflation below target and nominal rates at 4% (at 4.5% by the end of this year, on our forecasts), the bank has plenty of leeway and ammunition to react swiftly and aggressively, if needed, to a deflationary shock emanating from the housing market.
bottom line: mind the king put house prices are about 30% overvalued on our fundamental model. thus, the probability of a correction over the next couple of years must be high. however, absent obvious triggers, and with equilibrium house prices likely to move higher, a bust along the lines of the one 15 years ago is not inevitable. house prices may just slow, but not reverse sharply. also, as consumers have not gone on a spending spree, but rather increased their savings, a sharp correction in consumer spending looks unlikely to us. and, if such a correction were to occur, the bank of england would have plenty of ammunition to step in to contain the economic fallout of a house-price bust. ironically, however, this king put could propel house prices even higher in the meantime.
（摩根斯坦利全球论坛, joachim fels & melanie baker (london)）
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