Sunshine and showers, but no slump in UK housing market
A Lecturer in Finance with specialist areas for teaching and research in financial risk management and financial markets, he says: “In December my prediction for house prices in the UK for 2005 was more optimistic than many others.
“Unlike some analysts I saw no reason to believe that house prices would slump. Instead with interest rates and unemployment low - keeping mortgages affordable for homeowners - I predicted that house prices would remain ‘flat’ in 2005. Like the proverbial ‘swings and roundabouts’ the months where prices fell would, I forecast, be matched by those where they rose.
“With the benefit of six month’s hindsight this forecast is being borne out by events. Since last December prices have remained largely unchanged with some surveys reporting a small increase in levels and some a small decline.
“The gloomiest forecasts have not crystallised and, as the data from the Nationwide Building Society and Halifax (HBOS) below confirm, house prices now are close to where they were six months ago.
“The findings of the Nationwide and the Halifax are in line with Land Registry data on property transactions that show that average house prices in the first quarter of 2005 were 0.3% higher than in the last quarter of 2004. By contrast the observations by the research company, Hometrack are a little gloomier: they reported in May that house prices had fallen modestly in the first four months of 2005 bring the year-on-year decrease to 2.3%
“The overall picture in the light of all this data is, though, one of a ‘soft landing’ for the housing market. For the time being house price inflation has come to an end but it has not been replaced by house price deflation.
“So what are the prospects for the coming months? As I remarked in my survey six months ago falling house prices in the UK have been associated with periods of high unemployment and high interest rates – both prevailed between 1989 and 2003 when house prices fell by 20%. But currently unemployment is low, at 4.7% of the workforce, and is unlikely to rise markedly in the coming months. At 4.75% base rates remain low and have now been unchanged since August 2004.
“Additionally with house prices flat and incomes increasing (by 4.1%, excluding bonuses, in the year to March), the affordability of property has been increased marginally in 2005 for to all buyers. Nationwide’s data show that the ratio of average house prices to average earnings fell in the first quarter of 2005 from 5.9 to 5.7.
“Consequently the basis for materially weaker house prices is undermined by the lack of economic conditions to produce them.
“Indeed with interest rates in the UK now set to fall in the coming months, in the wake of falling consumer spending and a general slowdown in economic activity, it is feasible that house price inflation will rise again in 2006.
“Some concerns have been expressed about the impact on the housing market of the large numbers of mortgagors who are reaching the end of cheap mortgage deals taken out two years ago when interest rates were at their low point. Will the adjustment to mortgage rates that are now circa 2% to 3% higher than those deals of 2002 and 2003 cause a ‘payment shock’ and a crisis in the housing market? The probability is that the continuing competitiveness of product offerings allied to the likely fall in rates later this year should soften any such payment shock. Additionally, before approving mortgage applications, some lenders calculate whether the borrowers could afford the repayments due at rates significantly higher than on the deals they are currently offering – so for these borrowers the ‘shock’ to their mortgage payments should at least be affordable.
“Other recent developments encourage the view that house prices are well underpinned. The announcement of a Government supported share ownership scheme for house purchase for some first time buyers, although only minimal in the numbers it will help, is not a negative for house prices.
“Reflecting on the past decade, there is no mystery about reasons for the three-fold increase in average house prices (from £52,180 in May 1995 to £157,272 in May 2005: source Nationwide). A general rule in economics is that if interest rates fall asset prices increase. In the financial markets this happens instantly with movements in bond prices. It takes much longer to happen in the housing market - partly because the ‘transmission mechanism’ of buying property is slower that trading in the bond markets and partly because for a few years buyers of property remained concerned about whether there was going to be a return to the higher interest rates that prevailed prior to 1993. In due course, however, the economics prevailed and prices rose as greater affordability pushed up the purchasing power buyers could deploy for house purchase.
“Turning around this quantum change in prices requires a quantum change in the economic climate, and such a change is not even on the horizon.
“So my forecast remains that house prices will continue to move up and down modestly through the rest of 2005 and end the year with average prices close to where they started.
“In 2006 with affordability slightly enhanced an increase in house prices is more likely than a fall. So 2006 could see the showers disappear and a brighter, although not scorching, year for the housing market.”
