Is a Bust in UK’s Housing Sector in the Near Horizon?

Rising input costs have emerged to hamper on UK’s housing boom

From the Independent: (bold mine)

Rising costs are putting recovery at risk as the building industry comes up against severe skills shortages and soaring material prices, the industry warns today.

Construction – which accounts for around 6 per cent of the total economy – was badly hit by the recession but has seen a rapid expansion in the past year as the Chancellor’s Help to Buy scheme spurs housebuilding activity.

The majority of the building industry expects stronger growth over the next 18 months, according to industry trade bodies, but the cost of tendering work is rising as builders adjust to the new realities of shortages of both materials and skills.

Rising costs are manifestations of the insufficiency of savings and or resources and of the misdirected allocation of capital which has been induced by central bank easy money policies.

The unfolding developments in UK’s housing markets looks like a textbook Austrian Business Cycle phenomenon.

The transition from inflationary boom to deflationary bust as explained by the great dean of the Austrian School of economics, Murray N. Rothbard: (bold mine)

Once the consumers reestablished their desired consumption/investment proportions, it is thus revealed that business had invested too much in capital goods and had underinvested in consumer goods. Business had been seduced by the governmental tampering and artificial lowering of the rate of interest, and acted as if more savings were available to invest than were really there. As soon as the new bank money filtered through the system and the consumers reestablished their old proportions, it became clear that there were not enough savings to buy all the producers' goods, and that business had misinvested the limited savings available. Business had overinvested in capital goods and underinvested in consumer products.

The inflationary boom thus leads to distortions of the pricing and production system. Prices of labor and raw materials in the capital goods industries had been bid up during the boom too high to be profitable once the consumers reassert their old consumption/investment preferences. The "depression" is then seen as the necessary and healthy phase by which the market economy sloughs off and liquidates the unsound, uneconomic investments of the boom, and reestablishes those proportions between consumption and investment that are truly desired by the consumers. The depression is the painful but necessary process by which the free market sloughs off the excesses and errors of the boom and reestablishes the market economy in its function of efficient service to the mass of consumers. Since prices of factors of production have been bid too high in the boom, this means that prices of labor and goods in these capital goods industries must be allowed to fall until proper market relations are resumed.

Well, perhaps signs of depression may have surfaced as UK’s home prices has recently suffered a substantial pullback. The price retrenchment echoes on the 2007-8 crisis.

chart from Zero Hedge

From the Telegraph: (bold mine)

Asking prices have fallen steeply this summer as sellers slash their expectations in the face of dampening demand for new homes.

The price tag on the average UK property coming to market dropped by 2.9pc in the first half of August, the biggest summer fall ever recorded by the UK's largest property website, Rightmove.

Vendors, who have been trying to cash in on record high values, are now discounting to attract buyers who have been deterred by talk of interest rate rises and the eradication of cheap mortgages.

A glut of sellers coming to the market - there has been an 8pc increase in the number of homes up for sale compared with August last year - and a drop in buyer demand has driven down asking prices and tipped the UK into a buyers' market.

As one would notice, UK’s housing woes comes from both the supply side and demand side. If the above isn't an aberration, or if current trends in the housing market will be sustained, then UK's inflationary boom may just have hit the proverbial wall.

On the supply side, rising input cost in the housing sector will squeeze on profits, this will also limit expansion (corporate demand) as well as, expose on the accrued excess supplies that has developed out of the illusory expectations of perpetually strong demand from zero bound rates.

And all of the above will contribute to magnify the leverage problems used to finance the supply side ‘boom’.

On the consumption side, the law of demand—the higher the price, the lower the quantity demanded—has apparently been in motion. The previous uptrend of property prices has apparently reached an invisible critical threshold level that has commenced to impact demand negatively.

Yet for leveraged speculators, falling housing prices will most likely entail credit problems that will prompt for prospective liquidations, thereby compounding on both price and supply pressures in UK's housing bubble.

As one would further note, price distortions from central bank interventions has been fostering misperceptions. Consumers appear to be retrenching via ‘drop in buyer demand’ as against the producers who still ‘expects stronger growth’. 

The growing disparities or widening of gaps in expectations are signs of the consumer's evolving choices or of the consumer's re-establishing of their 'desired consumption/investment proportions'. The realignment of consumer's choices away from the producers will continue to divulge on the current state of accumulated imbalances that can be seen via the housing sector's overinvestment or overconsumption of resources or malinvestments.

Of course, other factors like sanctions against Russia may have also weighed on the UK housing predicament, but such would account for as aggravating circumstance or subsidiary cause.

Has UK’s recent housing downturn signaled the reversal of UK’s inflationary boom and a forthcoming depression? We shall soon see.

Don't worry be happy, stocks are bound to go up forever!