Should Investors Worry About House Prices?

<%= article.AuthorDisplayName %>

By

Owain Bennallack

Published in Investing on 12 October 2010

Will you need a hard hat or a hard head if property values plummet?

Hold that dinner party chat! House prices are stalling -- if not yet determinedly falling. But will the impact be felt in your portfolio?

Last week Halifax announced that UK house prices dropped 3.6% in September -- the biggest monthly drop on record. It was such an unexpectedly sizeable figure that the only sensible response was to shrug it off and wait for more data.

It wasn't long in coming. This week the RICS house price index fell to a 16-month low. RICS said prices are falling because homeowners are rushing to sell properties ahead of government cutbacks. This view was backed up by further RICS research showing more new homes being put on the market, even as new buyer numbers declined.

House prices make up such a sizeable proportion of the average person's wealth that we all feel richer or poorer when they fluctuate -- whether we own a house or not! But the housing market is also a critical barometer -- and arguably a driver -- of the UK economy. Rightly or wrongly, falling property prices are seen as bad for UK PLC.

So even as some of us see our bragging rights at a certain sort of gathering decline by 3.6%, should we be more worried about our share portfolios?

There are two sides to the story, and no certain answer (excluding the doomster view that deleveraging and the ascent of gold indicate we're all, well, doomed).

Yes: Falling house prices will hit shares hard

Many of the most popular shares held by retail investors are directly linked to the health of the housing market. 

For instance, Lloyds (LSE: LLOY) and Royal Bank of Scotland (LSE: RBS) are traded almost like gambling chips according to figures from the online brokers, as punters trade them based on the prospect of further writedowns. If lower house prices prompt banks to resume reducing the value of the assets they carry, their share prices will certainly be hit.

Plenty of other popular shares depend on the housing market, too. It's hard to see how house builders such as Taylor Wimpey (LSE: TW) or Barratt Developments (LSE: BDEV) could survive a deepening property slump. Other players in the property chain such as Rightmove (LSE: RMV) and Savills (LSE: SVS) may be more resilient, but they do require a reasonably healthy turnover in the market.

Certain specialist retailers such as Carpetright (LSE: CPR) and Aga Rangemaster (LSE: AGA) would also likely suffer. But why stop there? It's often said that £1 in every £7 spent in the UK goes through the tills at Tesco (LSE: TSCO). Falling house prices could mean less spending and so lower sales at it and many other major companies.

No: It's all in the price

Personally, I'm not convinced that UK equity investors need to be particularly fearful of lower property prices though. My several reasons could each be an article in their own right, so I'll summarize:

  • The damage is already done: UK house prices peaked in 2007, just before the credit crisis hit jobs, credit, and consumer confidence. Prices fell for only a year or so, but the reversal was sufficiently dramatic to wipe off 95% the value of Taylor Wimpey, for instance. Sure, current holders might lose what's left of their company in a second slump, but in terms of the broad market, house price froth long ago dropped out of valuations

  • Lessons from the 1990s crash: According to Halifax, after peaking in 1990 UK house prices fell steadily to bottom out in 1995. They didn't surpass their old highs until 1998. Yet over the four years from the start of 1991 to 1995, the FTSE 100 advanced more than 40%. By 1998 it was up over 130%. So much for lower house prices hurting shares!

  • The UK isn't the whole story: Estimates vary, but at least 70% of the FTSE 100's earnings are derived from overseas. As such, domestic house price fluctuations are a small part of even the macro picture for most companies. If anything, a weaker UK housing market will help investors, by allowing UK interest rates to be held down and so depressing Sterling versus other currencies, boosting the value of those foreign takings.

  • House prices aren't the whole story, either: Not even to housebuilders. On Tuesday, the housing minister Grant Shapps outlined his aspiration for a period of house price stability, and again promoted the New Homes Bonus scheme designed to encourage more homes to be built. That would keep housebuilders busy, and it would address the shortage of housing that some blame for the average unassisted first-time buyer being a positively geriatric 37 years old. The UK needs more affordable homes, not higher house prices. (Disclosure: I speak as a positively geriatric renter!)

Betting against the house

In my view, if you're disproportionately exposed to the likes of Lloyds or Barratt Developments, you have to take a view on falling house prices and what it might mean for your shares. But it's not at all clear to me that investors in the broader stock market need to fear re-wobbling house prices, or even a full-blown second slump.

What do you think? Will you sell your shares and buy gold if the Halifax reports prices plunging further? Or do you think ongoing lower interest rates will offset any negative impact?

Let us know in the usual spot below.

More on the markets:

> Owain owns shares in Lloyds, Aga Rangemaster and Tesco.

> Claim your FREE financial guides -- The Motley Fool has teamed up with a number of partners to offer our users free financial guides on topics such as tax planning, funds and much, much more. Click here to download your reports today!

Share & subscribe

Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

geddinquick 13 Oct 2010 , 7:48am

Excellent article. Do you see it as completely illogical to be a long-term bear on house prices and the inevitable long-term return to an average earnings multiple of c.4 (whatever else is going on) and simultaneously bullish on Lloyds?

TMFFlaneur 13 Oct 2010 , 9:39am

Thanks! Well, I guess I mustn't think it's illogical David because that exactly describes my position. (Short one house on valuation concerns, long Lloyds).

I've been wrong about property for a *long* time though (like a fair few other investors, but still...) having thought it expensive in 2003. I partly consider Lloyds and a couple of other related holdings (cash-rich Berkley Group, for instance) as a hedge against ongoing dunderheadness! ;)

mackeson29 13 Oct 2010 , 10:00am

The housing market took-off when the new Coalition government came-in (renewed hope, I guess), 'For Sale' boards up & selling fast literally everywhere in my location.

This was stopped dead in its tracks when the budget was announced - talk of doom & gloom made people stall & has done ever since. However 'For Sale' signs are beginning to re-appear & properties languishing onthe market for some time are suddenly starting to sell.

So - I find the 'statistics' on house price values always selective & well behind the actual situation on the street.

What does this mean for equities ? not a lot. Can't see how you value a FTSE company & then throw in a cautionary glance on the housing market.

I'll leave that to the owners of crystal balls & tarot cards. All I do know is that this country is full of sheep who seem to make their long term financial decisions based upon wild media speculation.

There, that feels better......

BarrenFluffit 13 Oct 2010 , 10:43am

The historic link between residential property and share prices is low; the main overlap is via the uk economy. If the economy is doing well employment prospects are good and people feel confident enough to buy houses. But typically share prices anticipate higher company earnings.

UncleEbenezer 13 Oct 2010 , 12:14pm

Those of us who were young and impressionable when the 1987 stock market crash was followed by house prices in 1989 may have spied a connection - one followed the other with a lag, because there was less money sloshing around.

The dotcom crash was different for at least two reasons. One, house prices at the time were at a historic low, so some upward correction was due. Two - and this is the damaging one - public policy had put in place perverse incentives that spawned a new breed of spivs and speculators. House prices shot up, the spivs were enriched, and investment was damagingly diverted from the productive economy into speculation.

Oh, and the money supply shot up. There's another difference: someone with as much clue as Thatcher wouldn't have sat back and lowered interest rates in the face of persistent double-digit M4 inflation - the money-printing that created the vacuum more recently filled by QE.

Housing isn't the only area where feelgood trumped investment. Look at our energy infrastructure for another example, where regulators put low prices to consumers ahead of updating capacity, leaving us now more reliant on imports.

Removing perverse incentives would be good for the productive economy, and for shares in good companies. But it'll take time for the pain to work through the system. And they current government is sending mixed signals: on the one hand reducing housing benefit to enrich landlords (and price out self-funding tenants), but on the other hand declining to do anything about empty properties. I'll believe they're serious when I see property hoarding - including "accidental" cases such as through inheritance - adequately disincentivised through the tax system.

Maybe the removal of property speculation at public expense from MPs perks will help there over time, as an enriched generation retire from ruling us.

UtterFoolery2 13 Oct 2010 , 3:31pm

I do question the data upon which the House Price Indices are based are they all relating to House Sales or do they include valuations for remortgage?
The typical remortgage is often based on a mortgage brokers view of value which is invariabley optimistic and sometimes downvalued, if these transactions are included in the figures then they will surely skew the results.

crinnis 13 Oct 2010 , 5:56pm

Equities? No way, double dip coming up! Interest bearing accounts? No way, lose in real terms! Property? Forget it, down 25% by end 2011. I've got cash, equities and property - here's hoping. Anything I do make will be taxed at 50%!! Australia ( or was it the moon?) here we come!

Luniversal 13 Oct 2010 , 8:23pm

Schhh, you know who. It's Grant Shapps with no 'c'.

Drunsfleet 14 Oct 2010 , 6:50am

Declining prices are only bad if you are a seller not looking to buy?

Otherwise we all get more for less - and it becomes easier for the first-time buyer to get on the property ladder and for those of us already on we get less for our existing properties but pay less for our prospective properties - whether we are up or downsizing.

We seem though to prefer to live in smaller properties with higher price tags than to live in bigger properties with smaller price tags?! Property as speculation not a home...

With stocks it is advisable to purchase based on value not price - not with property it seems...



SevenPillars 14 Oct 2010 , 9:00am

I have serious doubts about the abilty of the housing market to recover in either the short or medium term covering at least several years. The problem the market faces is that anyone buying a house will be required to be more accountable, FSA rules on checking income are likely to tell us over the next few years the true extent of the fraud that was going on in self-cert prior to 2007.

The market and prices have only stayed steady without a big fall because of low sales levels since then. The builders seem to have adapted or are trying to adapt to these new conditions, but other than for speculation I can't see a reason to buy them. When you now throw in austerity, public spending cuts, job losses, low pay rises or no pay rises, etc, the fundamentals clearly do not look good for the property market. Schapps house price stability comes at a price, hardly any sales and buyers, especially FTB's, needing deposits up to 40%. How do you save this amount when we have austerity? How do you save when you have Mr Bean at the BoE begging us all to go out and spend to keep the game going? It's the economics of the madhouse.

TMFFlaneur 14 Oct 2010 , 9:54am

@Luniversal - Oops, thanks for that. Fixed now! Apologies to the Rt Hon member for Welwyn Hatfield.

mackeson29 14 Oct 2010 , 10:34am

'Declining prices are only bad if you are a seller not looking to buy?

Otherwise we all get more for less - and it becomes easier for the first-time buyer to get on the property ladder and for those of us already on we get less for our existing properties but pay less for our prospective properties - whether we are up or downsizing.'

Absolutely agree - but we do need the market to function & keep moving. It seems now the market can be stopped dead by a bit of doom & gloom scaremongering & media splurge - which can even start off as a false statement - but become a self-fulfilling prophecy.

suse9 14 Oct 2010 , 12:28pm

There still seem to be a lot of new houses being built where I live in N Lincolnshire so presumably there are still people buying.

Join the conversation

Please take note - some tags have changed.

Line breaks are converted automatically.

You may use the following tags in your post: [b]bolded text[/b], [i]italicised text[/i]. All other tags will be removed from your post.

If you want to add a link, please ensure you type it as http://www.fool.co.uk as opposed to www.fool.co.uk.

Hello stranger

To add your own comment, please login.

Not yet registered? Register now.

More articles in this section

Beta

Tags for this article

House Prices
market commentary
Owain Bennallack

Login or register to add tags.

Beta

Related content