Will it really be a “W” shaped recovery in the UK Housing Market?
Posted by jamesdearsley on June 12, 2009
There has been a lot of talk lately about a recovery in the domestic housing market due to recently published figures; these were included in my post last week concerning the Weekly Paper Review – I was discussing something called a “W” Shaped Recovery. It got a huge response on both Twitter and LinkedIn with people agreeing. I thought I would expand on my thoughts and see if this really was the case if I looked into it with a little bit more detail.
When I first heard of the term I was asking “what actually is a “W” shaped recovery” and so this is where I will start my blog post.
Economists have started using the alphabet to describe economic models relating to graphical evidence of “recoveries”. They really speak for themselves but often it needs to be looked at in great detail to see why recoveries are taking on that shape.
The first person to really look at this particular housing market and give it an alphabetical tag was the Nobel Prize-winning economist Paul Krugman, who incidentally is also a New York Times Economist. Relating to the US housing market specifically he stated that the US wasn’t looking at a V shaped recovery as perhaps they were seeing in other financial markets, the stock market in particular.
Of course, the US is a difficult country to analyse because of its sheer size and people’s inability to accurately forecast an “average” property. Krugman went on to suggest however, that it was more like an “L” shape i.e. it would plateau for a while but would spring up once more. However, people are arguing that this means it will be more like a “U” shape rather than an “L”.
The classical “L” is best described by the Japanese economy only recently when they were plagued with the deflation problems. It is obviously something you want to avoid especially with regard a housing market and hence the US economists didn’t agree with Krugman and have settled on a “U”
So what about the “W” recovery?
It has been stated that the last time we saw one of these recoveries was back in the Great Depression in the US. Only the 2nd World War ended it all after decades of suggested recoveries. The building boom that followed the war paved the way for the economy to recover to a level not seen previously and finally pushed through the painful threshold of recession.
So are we seeing the start of a “W” recovery in the UK Housing Market? Personally and tentatively I say yes. I certainly don’t think we will be seeing a “U” recovery because we are already getting good figures back already, take the Nationwide who have recently stated that two in the last three months reported price increases in the Housing Market – see the article here – http://tinyurl.com/mphzhp. This also ruins, hopefully, the possibility of an “L” shape but what about a “V” shape recovery, said to be more common recovery. This is obviously the recovery that our current government are hoping for prior to the next election. I have two fundamental reasons for thinking that this will possibly not be the case; Unemployement levels and The Banks!
1. Unemployment levels are beginning to reach record highs. In May the number of unemployed reached 2.1 million (or almost 7.1%) and the Guardian reported that it jumped at its fastest rate in 20 years in April. See the article here.
The worrying figure was that it could reach 3 million by the end of the year – into double figures as a percentage. This will obviously have an effect on confidence in all housing markets – though, ironically, it is often said that unemployment lags behind the wider economy which could be following a “V” shape as economists are predicting currently
2. The Banks. Personally, I am more worried about who is causing this increase in house prices at the moment and the banks current reaction to mortgage credit. I have covered some worries here before on the last two Paper Reviews I have done and some of the papers covered (see article http://tinyurl.com/l47djs for example) The buyers at the moment are either very cash rich or, in the case of London, Foreign buyers surfing on the cheap pound. This is not a long term resolution to the housing market and unless the banks do a swift turnaround this market will cease soon – particularly as the Euro is starting to recover well. The UK needs its first time buyers back into the market to give it stability and gives it the ability to start growing again.
So you can see that it would be quite easy to slip into the “W” shape recovery here and if this if this is going to happen, I am predicting it will occur in the next 6-12 months before a recover at the start of next year to the middle of next year – in fact the Spring market next year, though it usually sees in upsurge anyway, could be in for a bumper time.
There is one word of warning here. We have to consider what would happen if the banks do start to release funding stipulations a little bit but the economy doesn’t recover OR the reversal of this. This could mean we would be presented by another recovery analogy; a shape similar to the square root. This is where the housing market bottoms out (we may have seen this), bounces back to about halfway from the previous peaks and then levels off for a while……..obviously something that those of us in the industry wouldn’t particularly favour.
To conclude, despite my fears of a square root or the potential “W” shaped recovery, I am still suggesting a recovery. This is a long way away from the darkest depths 12 months of ago which means we are heading in the right direction. To be honest, from here, it is down to matters outside of our control as to what recovery we are going to see. The banks and the government will really play an important role here as to how quickly we see this housing market recover, and lets be honest, Estate Agents are not going to worry about whether house prices increase, all they want is people to have the confidence to put their house on the market and open the possibility to buying another.
Therefore as always, it is confidence that everyone wants and the word “recovery” is more important than which letter of the alphabet it may be referring to.