There is such a broad range of benchmarks in the UK property marketplace, comprising surveys and reports which provide sometimes differing and sometimes similar pictures of the current state of the housing market. The rest of Europe could easily be forgiven for thinking that the UK is totally obsessed with property and, in particular, house prices.
There seems to be a worrying upwards trend which prompted Mervyn King, Bank of England governor, to announce in May that house prices seemed remarkably high relative to average earnings or average incomes or ‘anything else you could look at’.
There’s no harm in having numerous barometers – it’s a sign of a sophisticated market – however, it must leave the consumer and intermediary occasionally feeling confused. So, who’s saying what and should the industry be concerned about the forecasts?
This feature takes a look at the recent resurgence of UK house prices in the first half of 2006 and identifies some key trends within this growth. Using the latest barometers available, it will specifically examine the widening of the North/South divide, the possible effect of the volatile financial markets and the impact of prices on the already struggling first-time buyer.
Information overload?
The most recent figures released in May 2006 by property website Rightmove.co.uk suggest a shortage of properties for sale will help push up average house prices by 8 per cent in 2006, a revision from its original 2006 projection of 5.5 per cent. Perhaps to be expected from a property website, this is a more bullish forecast than those made by mortgage lenders such as Halifax and Nationwide, who expect house prices to climb by just 3 per cent during the year.
Recent surveys from Halifax, Nationwide and the Financial Times showed different annual price inflation with April measures of 8 per cent, 4.8 per cent and 4.3 per cent respectively.
In addition, the rate of April’s house price growth jumped to an 11-month high, according to the Department for Communities and Local Government (DCLG) – annual house price inflation rose to 5.1 per cent, up from 3.3 per cent in March.
In the UK, annual growth remains highest in Northern Ireland at 15.8 per cent, followed by Yorkshire and the Humber at 8.9 per cent and Scotland and the North East at 7.3 per cent. In London, property price inflation picked up to 7.1 per cent from 4 per cent during April.
We shouldn’t take one survey to be the measure but use the data collectively, which allows us to see the trend of increasing inflationary growth.
The Halifax measure says that growth rose to 9.1 per cent in May, its highest level for 14 months, but it added that there were increasing signs of a slowing market overall. In early June, this caused the Council of Mortgage Lenders (CML) to upgrade its house price rise forecast for 2006 from 2 per cent to 7 per cent.
According to Jim Cunningham, senior economist at the CML, ‘the small rise on short-term interest rates expected in the second half of this year combined with the rise in fixed term rates we have already seen is likely to result in a modest fall in transactions towards the end of 2006.’
There is no doubt that higher house prices push back affordability ratios, which are still stretched and will result in lower levels of mortgage transactions, but what’s the impact of house price rises on consumer spending decisions? According to the Bank of England’s survey of consumer attitudes to rising prices, the rebound in house prices over the past six months is unlikely to feed strongly into higher consumer expenditure and inflationary pressure – consumers’ appetite for further unsecured debt is diminishing and the amount of extra borrowing against property is slowing. Increases in housing wealth do not translate directly into higher spending because increasing house prices make those seeking to get on the housing ladder feel less wealthy (and therefore likely to spend less), while older people have more wealth to enjoy.
North/South divide widens
The North/South divide has increased if the latest figures are anything to go by. Rightmove found the average property in the South was now 55 per cent more expensive than it would be in the North of England, up from 46 per cent in September 2005.
Taking the country as a whole, the average property asking price is now £211,442, up from £209,839 in May 2006 with an average annual growth rate of 6.4 per cent. However, there is a wide divergence between different areas in the UK. Average annual growth in the South of England is 9.4 per cent, compared with 2.7 per cent in the North. These figures point to a reversal of the pattern over recent years where some parts of the South were seeing house prices fall while the North rose.
Growth in the South is being driven by London where cash-rich buyers are willing to pay high prices for premium property. Asking prices have risen 2.1 per cent in the capital over the past month alone, putting the average London property at £315,224. Some commentators believe the divide will become bigger if interest rates go up, since higher borrowing costs would hit activity in regions outside London the hardest.
First-time buyers
It’s a tough time for first-time buyers who must be growing tired of waiting for house prices to fall. Figures out in the last few weeks from the CML show that in April, first-time buyers accounted for a healthy 37 per cent of all loans, but what does this tell us?
Firstly, this confidence is likely to be driven by anxiety – those who have yet to buy their first home are worried they may be priced out of the UK property market permanently. Secondly, given that average property prices are now approaching six times earnings, these first-timers must be getting help from a variety of sources, largely from parents who have seen their own property values go up.
According to the CML, nearly 50 per cent of first-time buyers under 30 years of age, were given or lent money by relatives to buy a property (compared with 10 per cent in 1995).
In addition, they can borrow more from lenders than before – in April, average borrowings equated to a loan-to-income multiple of 3.22 times, a record high. I don’t believe this fact alone should cause concern. Not only do mortgage providers have an obligation to operate with a responsible lending mentality, but the CML figures on repossessions – 15,000 in both 2006 and 2007, up from a forecast of 12,000 – are not of too great a concern. Furthermore, most first-time buyers (approximately 75 per cent) are choosing fixed rate mortgages, according to the CML.
However, I do also believe the industry should continue to provide options for first-time buyers to get on the ladder. For example, there are a number of shared ownership schemes available where the individual buys a percentage of the value of the property and pays a reduced rent on the balance to a registered landlord. This will give people a start and enable first-time buyers to get on the ladder, even if the criteria for eligibility differs from scheme to scheme.
Stockmarket volatility
The financial markets have seen recent volatility which has wiped out the gains made since the start of 2006. Given that we saw major house prices fall a year after the ‘Black Monday’ crash in 1987, does the current turbulence have negative implications for house prices?
This is a question currently being debated by the experts. Barclays Capital has found that conditions in the markets in early 2006 are unnervingly similar to ‘pre-Black Monday’. Similar warnings were exposed about threats to the economy such as higher inflation, the weakening dollar and falling US house prices.
The recent slump in the markets will leave British homeowners out of pocket, raising the possibility that they will have to sell some of their property to raise money. But it also means the Bank of England should avoid raising rates which will further hurt cash-strapped investors – many experts envisage a small rise to say 4.75 per cent but not until the end of this year or beginning of next year.
Thankfully, the rise in house prices seems to be coming to a natural end, without extra help from the Bank – according to the Halifax and Nationwide, we can expect a slowdown. Back in 1987, prices had not stopped rising whereas now we are seeing a ‘soft landing’, which should reassure everyone about continuing volatility in the financial markets resulting in a property crash.
This stance is corroborated by new research from the Organisation for Economic Co-operation and Development (OECD), which has discovered that the UK is less likely to crash than other Western countries such as the US, Spain, Denmark and France, with the probability of house price correction now barely one in 20, even if the Bank does increase interest rates in the coming years.
Through complex economic modelling, the OECD shows the probability of UK house prices peaking or slumping is only 4.60 per cent. If the Monetary Policy Committee (MPC) raises rates to 5.50 per cent, the probability rises to 8.90 per cent. Only last year, some analysts were predicting the probability of a UK house price collapse was around 30 per cent.
So, after witnessing a seemingly never-ending growth in the UK housing market, we can see a glimmer of reality check. More importantly, the figures and data the industry has at its disposal should provide some reassurance the Bank of England has managed a soft landing well, and that we won’t see a property crash. Let’s see what the figures say in six months.
