House prices have been the hot topic of 2007, and the interest looks set to continue as we move forward into 2008.
Looking back over 2007 reveals a mixed pattern of house price movements. A mixed pattern of monthly price rises and falls is a typical feature of a more subdued housing market. For example, there were six monthly falls and six monthly increases between July 2004 and June 2005 as the market slowed in response to a series of interest rate rises during 2004.
Price rises have been recorded in eight of the 11 months so far in 2007. This compares with 2006, when increases were recorded in nine of the 12 months. That said, it is worth noting that five of these rises were below 1 per cent. In 2006 just two of the rises were below 1 per cent.
Latest figures show that house prices fell by 1.1 per cent in November, the third consecutive month that a modest monthly price fall has been recorded. Despite these recent falls, house prices were £8,714 higher at the end of November than at the start of 2007, an increase of 5 per cent. This compares with the same period last year when house prices increased by £16,294, or 9 per cent.
Annually and regionally
Looking at the annual picture, prices have increased by 6.3 per cent. The fall in the annual rate of house price inflation was expected and was in line with forecasts.
The strong monthly house price gains during the Autumn of 2006 have dropped out of the year-on-year comparisons, pushing down the annual rate. Indeed, the annual rate in October was 8.9 per cent, down from 10.7 per cent in September, taking it back to single figures. Single-digit house price growth is not unusual, the long-term average rate of annual growth is 8 per cent.
House prices have increased by 57 per cent over the past five years, from £123,916 in November 2002.
Looking at the regional picture, house prices have increased in all regions during 2007 up to Q3. There has been double-digit annual growth in Northern Ireland (23 per cent), Scotland (10 per cent) and Greater London (12 per cent).
The remainder of the country has experienced single-digit growth with the smallest increases in the Midlands, Northern England and Wales. The strong growth in Northern Ireland follows on from a very strong 2006 when a 33 per cent increase was reported. Scotland too enjoyed a prosperous 2006, recording a 12 per cent rise.
Downward trend in activity
Industry sources all report a continued downward trend in housing activity since Autumn 2006. By the end of Q2 2007, mortgage approvals to fund new house purchases were 8 per cent lower than in Q4 2006.
According to the Bank of England, mortgage approvals to fund house purchases fell by 12 per cent in November to 88,000 (seasonally adjusted). Approvals in November were 32 per cent lower than a year earlier.
Furthermore, according to the Royal Institute of Chartered Surveyors, completed property sales are down 15 per cent on an annual basis and new buyer interest in purchasing a house fell for the 11th successive month in November. This indicates increasing caution among potential buyers.
The wider economy
The situation in the US has been widely reported globally. It has even led some commentators to speculate that a similar downturn will occur in the UK.
The housing market has slowed this year, but this slowdown must be viewed in the context of the exceptionally high growth during 2006. Critically, the housing market has been, and will continue to be, underpinned by a very strong economy.
A robust UK economy and the accompanying sound health of the labour market provide strong underpinnings for the housing market. Gross domestic product (GDP) increased by 0.7 per cent between Q2 2007 and Q3 2007.
This was the eighth consecutive quarterly increase above the long-term average rate of 0.6 per cent, underlining the strength of the UK economy. The number of people in employment in Q3 2007 was 178,000 higher than in Q3 2006.
Another key differentiator between the UK and US housing markets is the fundamental supply and demand imbalance that exists in the UK.
The ongoing inability of the rate of house building to match the pace of new household formation and pent-up demand from a large number of potential first-time buyers will also support property prices.
This imbalance will remain for the foreseeable future. We calculate that the government’s target of building three million new homes by 2020 is more than half a million short of what will be required, based on current official household projections. Moreover, these household projections are likely to be revised up to reflect the recent significant increase in the government’s population projections, implying that the housing shortfall will be even higher than we currently estimate.
Base Rate movements
Conditions in world financial markets have, without doubt, affected monetary policy prospects both globally and in the UK. Following much speculation the Monetary Policy Committee cut the Bank of England Base Rate on 6 December.
The slowing of the housing market is largely due to the increases in interest rates between July 2006 and July 2007 – rates have increased by 1.25 percentage points over this time. The cut will help to maintain buyer confidence and relieve some of the pressures on householders’ finances.
Predictions for 2008
We forecast house price growth to be flat in 2008. There has been a steady easing in house price growth during 2007 as the rise in interest rates since August 2006 and negative real earnings growth have curbed demand.
The impact of higher interest rates will bite further in the coming months. Higher food prices, energy prices and council tax bills will also take up more of home owners’ income, reducing the amount house holders have to spend on housing.
That said, the ongoing supply shortage of housing, particularly the persistent inability of the level of house building to match new household formation, will help to underpin current valuations and support house prices during 2008.
Strong fundamentals will continue to underpin demand. The UK economy will remain in essentially good health and is set to extend its record-breaking run of continuous growth despite growing more slowly than in 2006 and 2007. Employment levels – a key driver of housing demand – will also stay high at record levels
The Bank of England is expected to cut the Base Rate during 2008. Lower interest rates will help to maintain confidence and relieve some of the pressure on householders’ finances.
House price growth is forecast to slow across the UK. Regionally, modest price growth is expected in southern England and Scotland during 2008.
Property transactions are expected to bear the brunt of the slowdown in 2008 with levels down on this year. It is, therefore, likely that there will be an increased emphasis on the remortgage market as we move into 2008. More people may also consider borrowing against their property to make improvements to their current home.
To conclude, the outlook for 2008 is more subdued than in recent years, but remains healthy. The economy is strong and the continual shortage of the supply of houses on the market will continue to support house prices.
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