The housing market is recovering; demand and prices are rising. The housing market is suffering; demand and prices are falling. The London market is buoyant. The London market is starting to fall. We’ve heard each of these statements, more than once, in the past week and decided to try to make sense of the conflicting opinion in the property industry and forecast the true situation over the next few months with our own property market report.
Read on for an uncomplicated overview of commentary surrounding the market, along with our own analysis, aimed to give an understanding of the key factors and their likely effects to those who are not property experts but would like to know more about it.
Slow UK economic recovery – property market report
The government announced this week that the UK recession has deepened after the output of the economy fell by 0.7% between April and June. The contraction was much bigger than expected and follows a 0.3% drop in the first three months of the year. It marks the third successive quarter of contraction, leaving Britain in its longest double-dip recession in more than 50 years.
The mood following the Q1 negative growth announcement was stoic; it was the last quarter where we would see a fall, markets were picking up and it was expected that we would soon be seeing GDP growth. Unfortunately, as a result of GDP falling by a further 0.7% in Q2, a combination of lenders becoming more cautious and buyers choosing to wait until they are more financially secure before committing to a mortgage will put increased pressure on house prices.
House prices remained surprisingly resilient during the first quarter of 2012 despite continued UK and EU economic uncertainty, however, we cannot expect this to continue. We expect that the 1.5% fall in prices in June is just the start of a price drop of around 6 – 8%. Previously in 2012, property prices fell in the north, while the markets in London and the south were relatively unscathed and helped to prop up average prices. We are now seeing areas of the south affected too, including several boroughs in London, which will result in a significant drop in average house prices over the coming months.
The key indicators that Quick Move Now uses to forecast the market are all alerting that a price tumble is imminent, the likelihood of which is intensified by these Q2 GDP results.
Looking at how house prices track one of the key UK market indicators, the FTSE index, we can see that since the end of 2002, both London house prices, and those in the rest of the UK, tracked the FTSE relatively closely. Given that since the beginning of 2011, the FTSE has showed a downward trend, we can reasonably expect that house prices, particularly those in London will follow suit.
This graph shows Land Registry data only released until the end of Q1 2012 and it is no surprise that RICS is warning that the housing market is in the doldrums. Almost two thirds of surveyors said house prices had failed to pick up in the three months to June, while 22% more surveyors reported a fall in house prices during that period than those reporting a rise – the gloomiest reading for eight months.
House prices v net mortgage lending growth (NMLG)
The Bank of England released figures comparing NMLG (the % change in the number of mortgages approved) and when comparing these against house prices, the popular view is that values will have to buckle as there are simply fewer mortgaged buyers available. Analysts predict a fall in prices of anywhere between 3 and 15%.
Seemingly indicating the start of this price fall, the June Nationwide UK house price index was down by 1.5%, with some areas of the country seeing falls of up to 9% in the last quarter. The British Bankers’ Association has just announced that the number of new mortgages approved in June fell by 20.5% and we can only see this having a further increase in the downward pressure on house prices.
Is this fall because lenders are declining applications? Or because less people are applying?
Banks are facing high borrowing costs and reduced credit availability and as a result, their criteria have tightened significantly therefore the percentage of mortgages approved has declined.
What we are also seeing now is a reduction in buyers attempting to secure a mortgage or re-mortgage existing property. Economic uncertainty has led to a shift in focus from a credit society to a nation of savers, with a growing number of people working to reduce debt and increase security. Personal deposits rose by 5.1% over the twelve months to June and high street banks saw £16.1bn flow into ISA’s, compared with £10.2bn in the first half of 2011.
The Royal Institute of Chartered Surveyors (RICS) states that fewer houses have been put up for sale in the last quarter, also contributing to the fall in mortgage applications.
End of the stamp duty holiday
The stamp duty holiday (which allowed first time buyers exemption from stamp duty on properties up to £250,000) ended at the end of March and opinion varied widely on the effect that this would have on the market. Most analysts predicted we would see a sharp drop off in house sales in the first time buyers sector of the market, and indeed, that is what has happened. RICS comments that;
All of our indicators show a market in decline. Demand remains weak – interest has flagged ever since the end of the stamp duty holiday.
According to the Council of Mortgage Lenders (CML);
The number of loans lent on properties costing between £125,000 and £250,000 fell by 70% in April compared to the previous month and the number of mortgages lent specifically to first-time buyers between March and April dropped by 48 per cent in April due to the policy ending.
It was hoped that the Government backed NewBuy scheme (where first time buyers can secure a 95% mortgage on new homes) would take the place of the stamp duty holiday as a market stimulus among first time buyers. For a variety of reasons, including the difficulty for first time buyers to save 5% of the value of a new build house in the current economic climate, the NewBuy scheme has failed to take off.
The Eurozone situation is worsening each day, and while the Coalition has extracted the UK from the Eurozone’s bailout funds, a full-blown crisis will probably mean Spain will also need a loan from the International Monetary Fund, of which Britain is a leading member.
So what does this mean for the property market? Back in 2011, Reuters analysts were warning that if the Eurozone sovereign debt crisis worsened, we would see house prices fall by up to 6.5% in 2012. This appears to be happening now, and in addition, banks are set to become even more cautious about lending, with mortgage deposit rates of up to 20% becoming the norm.
The future of the Eurozone is an unknown, even the most experienced analysts and the Bank of England cannot predict the outcome, but it is set to have an impact on UK lending, and therefore the housing market, for a considerable amount of time to come.
London house prices
A fall in London prices is worrying for two reasons. Firstly, London prices have propped up the UK average so far during 2012, and if they stop doing that, the real price fall that we’ve been experiencing will become obvious. Secondly, when the London market falls, the rest of the UK tends to follow a month or two later.
The recent 0.2% fall (in London house prices) takes the average house price in the capital to £368,049″according to the Office for National Statistics. Estate agents say prices in the prime market in central London and other affluent districts are still holding up or even rising. But in some suburbs, prices are falling. A spokesman for the Council of Mortgage Lenders said: “The fall is modest. But it does show that even a powerhouse like London, still a driving force for the rest of the UK, is not immune from weakness in the wider economy.
The Rightmove.co.uk July house prices index below compares the best and worst performing areas in terms of asking prices in London over the past month and given that even some of those in the top five are reported to be falling, and those in the bottom five falling by up to 8.9% compared with a year ago, it appears that London property prices are indeed dropping.
Asking prices v achieved prices
Asking prices increased steadily in the first half of the year, but selling prices have remained consistent. The gap between them is on an upward trajectory, currently running at 34%, 9% above the long term average of 25%.
Reuters reported that in a poll of economists, on a scale of 1 – 10, where 1 is extremely cheap and 10 extremely overvalued, UK houses rate 7 so perhaps this is no surprise.
The July asking price index has just been released by Rightmove.co.uk and a recent drop in asking prices of 1.7% suggests that sellers may be becoming more realistic and starting to react to the reduction in available buyers.
Is there any good news?
- Some reasons have been put forward for the fall in GDP during the last quarter – wet weather, an extra bank holiday, the Royal Wedding and the Olympic games. If these have had a significant impact, and the true story is more positive, we could see the GDP figure revised upwards at a later date.
- Anecdotal reports from estate agents on the ground report that sales are holding up and even starting to pick up and HMRC announced that completed sales for the first half of the year were 11% up on the same time last year.
Similarly, John Cridland, Director General of the Confederation of British Industry comments:
When I’m out and about talking to businesses, it’s clear they don’t feel as negatively as this data (GDP figures) would suggest.
A number of headwinds have been working against us, including the Eurozone crisis, and a weakening in other global markets. Looking forward, however, the outlook for the world economy outside of Europe is more positive.
In addition, inflation is continuing to come down, giving households a much-needed fillip. This alone should help lift confidence levels in the coming weeks and months.
- There has never been a better time for buy-to-let investors and landlords. Low interest rates, rocketing rental demand and a plethora of properties for sale means those who can afford to buy now will see a solid return on investment.
- It is still widely expected that the UK economy will be showing positive signs of growth and recovery by the end of 2012, although this depends largely on the outcome of the Eurozone crisis. This would be a positive boost to the property industry as increased confidence would lead to increased demand for property.
- The Bank of England and the Treasury have announced a new scheme, called Funding for Lending, which will make low-cost funds available to banks and building societies. This will begin in August and will be open for 18 months.
Banks and building societies will be able to borrow for a fee of 0.25%, over four years. That interest rate is much lower than it currently costs them to borrow on the wholesale markets.
Chancellor George Osborne said he hoped it would support households and businesses, he said;
At a challenging time, contributing to increased funding costs for UK banks and tighter credit conditions for households and businesses. The scheme will support the flow of credit to where it is needed, and will release much needed funds to the property market.
Conclusion – what is the forecast for the property industry for the next few months?
- UK and EU economic situations will continue to hamper property market recovery
- Lack of confidence and more cautious lending reducing amount of mortgages approved
- Saving will continue to take precedence over borrowing
- House prices are set to fall, opinion varies widely over by how much, Quick Move Now predicts a fall of around 6 – 8%