UK Housing Market

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by Simon Creer 

Spring brings about a flux in nature and traditionally sees an increase of activity around the housing market. Contrast is the most accurate word to describe the housing market right now.

Headlines announce record price growth while small groups of sellers are dropping their asking prices to entice buyers. Rightmove.co.uk, a website that lists over 600,000 properties for sale, indicates that asking prices for a typical home in England and Wales jumped £8,000 between mid-March and mid-April. However, with interest rates up another 0.25%, to a rate of 5.5% buyers are stretching themselves to breaking point. So the question remains. What kind of bloom can buyers and sellers expect from the housing market this spring?

A comparison of figures shows certain discrepancies. While Rightmove.co.uk notes this hefty increase, the largest since 2002, The Land Registry and Halifax price index suggest average prices rose by just 1 percent in March. Halifax's figures mark the second lowest monthly increase since August 2006.

It is clear a gulf is opening up between data based on asking prices and data based on final sales from mortgage lenders and the government. A discrepancy like this suggests that confidence in the market has become a greedy over-confidence and some are pushing their luck. This bullish market has placed British house prices at six times the value of average incomes and 20% higher than the crash of the nineties. Yet sellers are still valuing their houses at ever higher rates.

The website, www.moneyweek.co.uk, can see signs of a healthier market as one would expect in the spring but also points out that following nine relatively slow months an over abundance of supply means that transactions are below normal levels for this time of year. Moneyweek also suggests that in spite of these difficult conditions, the four weeks of April saw 106,000 new sellers and estate agents increase asking prices by 1.3% to a new record level.

This recent surge may well be due to the flurry of activity in response to HIPs (Housing Information Packs). These are essentially a seller's pack that will include essential energy efficiency and title information. At the time of writing these come into effect during the summer. The compulsory nature and cost of these packs may be causing sellers to speed up their sale. However, Jack Straw has announced a vote in the commons hat may remove the need for HIPs.

Asking prices inflating in such a way would suggest repercussions into the broader housing market. The theory is, as it becomes harder to get your foot on that first rung of the property ladder the more likely you are to rent a property until you have the capital to buy. This in turn should drive rent prices up. This, however appears not to be happening. Buy-to-let properties are not seeing a substantial return in rental prices.

First Time Buyers and the Housing Market

First time buyers may take a little solace from Miles Shipside, commercial director of Rightmove.co.uk. A slow down in the market, especially the high-end properties will begin to trickle down the buyers' chain. He says, "In order to attract a first time buyer," to kick start a chain, "everyone involved will need to reduce their prices and pass this reduction down the chain." This could well result in a downturn in price inflation from estate agents but nothing is guaranteed.

The housing market, however, appears to be defying received wisdom and flying in the face of economic expectations. Will Hutton, writing in The Observer on May 6, foresaw this becoming a real problem. "Who remembers only 15 years ago?" He asks, "The British housing market went badly wrong; prices plunged and nearly a million buyers were trapped in their homes for years because the price was lower than the value of their mortgage."

An echo of this concern can be found in an ABN AMRO, the Dutch bank, report from April. The team of analysts indicate UK housing is overvalued by almost 50%. In total they estimate a 180% cumulative price increase in the last decade. This report goes on to say; "the Bank of England has created the risk of disorderly correction in the future." Will Hutton's fears of a coming crash may be well founded.

In addition to this ABN AMRO suspect housing in the UK has been "re-rated" meaning recent cuts in interest rates allowed households to sustain higher levels of debt. If this has been the case the suggestion is that a rise in long-term interest rates could leave prices vulnerable to a correction.

In furtherance the bank indicate that an interest rate cut in August 2005, "helped foster a recovery in activity and seems to have created an impression that the Bank of England will not let house prices fall and reinforced the perception that UK housing is a sound long-term investment. Consequently speculative activity in the housing market has rebounded."

Data from the Council of Mortgages lenders supports this, illustrating that 25% of new mortgages taken out for the purpose of buying a house are buy-to-let mortgages. AMRO say "the expectation of capital gains has encouraged investors to ‘hoard' housing. If expectations about future house price gains flip, buy-to-let demand could rapidly wane as supply simultaneously increases."

Buy to Let and the Housing Market

The market may well buckle under the pressure of this volume of buy-to-let properties. Investors are more often than not very highly geared. Some are experiencing a sub 1% return and relying purely on capital gain. Should nerves get the better of these investors a mass dump could result in a property flood. This would manifest itself in a potentially significant downturn in the market.

The May housing market survey by the Royal Institution of Chartered Surveyors (RICS) suggests that house prices have slowed to the slowest pace since last May as interest rate hikes have worsened buyer affordability. A RICS spokesman claims this is because "interest rises have started to worry would-be buyers with many concerned that they will be unable to meet mortgage repayments."

The result of this he believes is that the "market conditions remain tight." www.firstrung.co.uk believes "one in seven could struggle under higher interest rates." In addition to this, RICS indicate; "new instructions to sell property have gone nine months without a rise the longest stretch in seven years."

So what next for the Housing Market? 

Whether this spring will see bloom in housing or a market full of bluster seems uncertain. With affordability becoming unobtainable for many and interest rates rising many will become stretched financially. If affordability wanes, this will be felt throughout the market as chains find it near impossible to entice first rung buyers. While the housing market remains relatively bullish after a decade of sustained growth it is being held up by speculative activity and buy-to-let properties.

 Caution is the watchword for this season. Interest rates will need to stay high in order to control inflation and limit bank lending growth. The buy-to-let market which appears to be keeping the market buoyant now is more fragile than it at first seems.

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