A Tale of Two Recoveries

Analysis of the latest GSPC house sales data

Results from house sales in the first quarter of 2015 reveal a continued upward trend in annual house price inflation in the West of Scotland. Prices rose by 4.1% over the past year, making it the fifth quarter in a row that annual house price inflation has been positive.

Whilst an upward trend in house price inflation is not evident from the last 5 quarters alone, if one considers a longer period, starting from quarter 3 of 2008, these 5 quarters do appear to be part of a rising trend – see the line marked Recovery 2 in Figure 1 below. The estimates are based on GSPC house sales data which includes a rich description of house characteristics allowing us to control for the mix of properties coming onto the market and produce more robust estimates of house price inflation.

Figure 1

Recovery 1

So how does the current upswing in house price inflation (Recovery 2 in Figure 1) compare with the previous one (Recovery 1)? Is history repeating itself? And are we heading for another boom-bust cycle?

One noticeable similarity between the two upswings is how “linear” the trend is in both periods. Ignoring the quarter-to-quarter volatility, the growth in house price inflation during the upswing appears to follow straight line. This is not necessarily a welcome feature, of course. For example, the end of the last house price boom came not with a steady slowdown—no gradual curvature as the economy converged to its peak. Rather, we experienced a sudden switch from a steep upward-sloping straight line trend to an even steeper downward-sloping one.

There are, however, two striking differences between the respective periods. The first is the gradient of the trend lines which is noticeably shallower in Recovery 2 than in Recovery 1. House price inflation is rising once again, but at a slower pace. The second difference worth noting is the lower volatility of the previous recovery. House price growth wavers modestly around the Recovery 1 line. This is in stark contrast to violent swings that characterise annual house price inflation in Recovery 2. We are climbing the mountain again, but this time the gradient is shallower, and the route is rockier.

To some extent, of course, the comparison is artificial. In Recovery 1, we are not drawing the line from the bottom of the slump (the GSPC data doesn’t allow us to go back that far). Note also that in Recovery 2, consumer inflation is noticeably lower (now less than half a percent).

Nevertheless, there is an interesting question to be asked about whether the current housing market recovery is sufficiently similar to the last one to warrant concerns about it coming to a similarly precipitous end.

Given the thoroughgoing reforms of the mortgage market since the financial crisis, it seems unlikely that the next shock to the economy will be identical to the last one. But then, it never is.

But perhaps the more gradual and tentative nature of the current recovery will, ironically, help to prevent the emergence of another bubble. It’s harder to over-inflate a leaky balloon. And as the graph of selling times in Figure 2 illustrates, the current recovery certainly has some “leaky” features. Despite (or because of) the continued growth in house prices, home owners are finding that it’s actually taking longer to sell—selling times (the number of days it took to sell a property) are up by 2% on this time last year. Selling times have been on a downward trend since their peak in 2011, but at the current average of 118 days to sell a property, they remain well above the levels of the last recovery. These are not the features of an overheating housing market. Certainly, compared to relatively steep decline in selling times during the previous recovery, the current trajectory for time-to-sale appears to be taking a more serpentine route.

In short, house price inflation in the West of Scotland continues to trundle upward, but with just enough fragility to deter us from gambling our livelihood on it.

Figure 2

Recovery 2