Put simply, debt funded the housing boom. Innovative mortgage schemes tempted borrowers and this led to demand outweighing supply and inflated prices. This was unsustainable in the credit crunch when prices were dragged back to more realistic levels.
The market bottomed in early 2009 at c.20% off the peak and since then prices have gradually moved upwards. That is until now when indices reported a fall for the month of February although prices differ depending upon which index you favour. Below Forward Financials investigates the data and the outlook.
Land Registry
Average Price GBP£164K (Feb 2010 data)
Monthly Change - 0.3%
Annual Change + 7.0%
Nationwide
Average Price GBP165K (Mar 2010 data)
Monthly Change + 0.7%
Annual Change + 9.0%
Halifax
Average price GBP169K (Mar 2010 data)
Monthly change + 1.1%
Annual change + 5.2%
"The Indices"
Why do key indices paint a different picture of the market? Simply because they use different criteria. The Land Registry index covers all completed house sales, even those for cash (c.30% of all sales according to the Council of Mortgage Lenders) although is restricted to homes in England and Wales. The Lenders, however, record prices at the point at which they agree mortgages and so exclude cash buyers but include Northern Ireland (where prices have fallen significantly) and Scotland.
To add more confusion, early 2010 was not market typical due to the extremely poor weather conditions and the end of the stamp duty holiday. Our advice: follow trends and don't switch between index commentary particularly when it comes to time and regional variations.
So what lies ahead? Consensus indicates that house prices still remain too high with some forecasting a double dip. Evidence to support this lies in the fact that the average house price to income ratio is still much higher than the long term average.
"The balance of demand and supply remains key"
Recovery to date has been aided by a significant reduction in mortgage rates. Despite this, the latest data suggests that lending has actually declined albeit reflecting a fall in demand and more cautious lending criteria. The Bank of England has once again held the official bank rate but as lenders compete more fiercely for deposits and their margins tighten this is likely to cause pressure to raise mortgage rates which will feed through to prices quickly as the market is dominated by short term deals.
Demand will also continue to be negatively impacted by: household wealth driven by continuing unemployment, shorter working hours, wage freezes, taxation and inflation; the fact that government schemes cannot continue to support mortgage lending indefinitely and; the need for banks to raise equity and strengthen their own balance sheets if they are to continue lending.
On the supply side, recovery to date has been built on the scarcity of homes for sale as owners have been unwilling to lock in losses, housebuilders have cut output and planning authorities have fallen well short of government targets. In Jan/Feb 2010, however, the supply of homes increased as sellers returned to market and builders increased activity and in March the growth in the number of homes coming to market actually exceeded new buyers registered.
With initiatives such as Persimmon's "flat-packed" homes, supply can quickly match demand and, with the average landbank now pushing upwards to nearly 6 years, there is no shortage of land on which to build such homes. This should prove helpful to soak up pent up demand when hopefully the country settles post-election.
"We currently remain in a state of political and economic uncertainty"
The Budget met with positive industry comments in terms of the increased stamp duty limit for first time buyers and the easing of industry regulation. Alone, however, it is unlikely to be sufficient to overcome a mountain of negative factors particularly as the election hovers disturbingly over the peak spring season.
Labour has been criticised for its proposed increase in National Insurance which may dampen demand despite the stamp duty holiday, its promise of more affordable homes and an agreement that banks will lend GBP105Bn to homebuyers/businesses over the next year.
The Conservatives meanwhile will make the stamp duty threshold increase permanent, end hips and let councils keep more of the proceeds from council tax/business rates on new developments to boost the market.
The Liberals promise cheap renovation loans to the owners of 250,000 empty homes to get them back into use.
A hung parliament is likely to do nothing for the industry with policy uncertainties likely to push up interest rates.
House auction prices are often seen as an early gauge as to the future of the housing market and auctioned homes are currently selling at a large discount to the conventional market suggesting that prices have yet to fully correct. Regional variances will, however, continue to apply particularly in London.
"The increase in UK house prices is slowing"
Whilst demand is likely to continue to outstrip supply there is evidence that the imbalance between the two is reducing.
Current data suggests that more people are now viewing this as a time to sell rather than buy homes and as a result this will help contain upward pressure on house prices going forward.
Quick Facts
- The average age of a first time buyer without parental help is now 37.
- In April 2008 the Halifax mortgage rate for existing borrowers was 7.25%, over twice its current rate.
- The Land Registry index, whilst more inclusive of data for homes in England and Wales, lags the Nationwide Index in terms of timing by c.one month.
- The house price to earnings ratio now stands at nearly 5.5x having peaked recently at over 6x against a long term average of 4x.
- 20% of Persimmon's new stock reflects factory-built, flat-packed homes. They predict this will rise to 50%.
- February home auction prices were 30% discounted.
- The top end second home market remains buoyant due to cash buyers and a weak pound despite higher taxation threats.
- Cornwall remains one of the hottest second home locations.
London
- London benefits from an acute shortage of homes as well as higher overseas demand. This has recently been further boosted by the weakness of the pound.
- Over the past few months the London market has also been favoured by the upturn in the financial services sectors.
- The price of the average home in the Capital differs depending on your choice of measurement. This ranges from GBP270K to GBP370K, twice the national average.
- Trends indicate strong annual growth although month on month rises are slowing with the Land Registry reporting a 0.5% fall in prices last month.
- CB Richard Ellis estimates that you need an average salary of over GBP56K to support a mortgage in London.
- With its greater number of high earners with expensive properties, London is likely to be most impacted by the forthcoming election outcome. This is due to Labour's proposed tax increases on both income and top end stamp duty.
- New initiatives in the Capital to aid homebuyers include "Pocket" homes. These represent cheap, extremely compact homes aimed at key workers.
The market bottomed in early 2009 at c.20% off the peak and since then prices have gradually moved upwards. That is until now when indices reported a fall for the month of February although prices differ depending upon which index you favour. Below Forward Financials investigates the data and the outlook.
Land Registry
Average Price GBP£164K (Feb 2010 data)
Monthly Change - 0.3%
Annual Change + 7.0%
Nationwide
Average Price GBP165K (Mar 2010 data)
Monthly Change + 0.7%
Annual Change + 9.0%
Halifax
Average price GBP169K (Mar 2010 data)
Monthly change + 1.1%
Annual change + 5.2%
"The Indices"
Why do key indices paint a different picture of the market? Simply because they use different criteria. The Land Registry index covers all completed house sales, even those for cash (c.30% of all sales according to the Council of Mortgage Lenders) although is restricted to homes in England and Wales. The Lenders, however, record prices at the point at which they agree mortgages and so exclude cash buyers but include Northern Ireland (where prices have fallen significantly) and Scotland.
To add more confusion, early 2010 was not market typical due to the extremely poor weather conditions and the end of the stamp duty holiday. Our advice: follow trends and don't switch between index commentary particularly when it comes to time and regional variations.
So what lies ahead? Consensus indicates that house prices still remain too high with some forecasting a double dip. Evidence to support this lies in the fact that the average house price to income ratio is still much higher than the long term average.
"The balance of demand and supply remains key"
Recovery to date has been aided by a significant reduction in mortgage rates. Despite this, the latest data suggests that lending has actually declined albeit reflecting a fall in demand and more cautious lending criteria. The Bank of England has once again held the official bank rate but as lenders compete more fiercely for deposits and their margins tighten this is likely to cause pressure to raise mortgage rates which will feed through to prices quickly as the market is dominated by short term deals.
Demand will also continue to be negatively impacted by: household wealth driven by continuing unemployment, shorter working hours, wage freezes, taxation and inflation; the fact that government schemes cannot continue to support mortgage lending indefinitely and; the need for banks to raise equity and strengthen their own balance sheets if they are to continue lending.
On the supply side, recovery to date has been built on the scarcity of homes for sale as owners have been unwilling to lock in losses, housebuilders have cut output and planning authorities have fallen well short of government targets. In Jan/Feb 2010, however, the supply of homes increased as sellers returned to market and builders increased activity and in March the growth in the number of homes coming to market actually exceeded new buyers registered.
With initiatives such as Persimmon's "flat-packed" homes, supply can quickly match demand and, with the average landbank now pushing upwards to nearly 6 years, there is no shortage of land on which to build such homes. This should prove helpful to soak up pent up demand when hopefully the country settles post-election.
"We currently remain in a state of political and economic uncertainty"
The Budget met with positive industry comments in terms of the increased stamp duty limit for first time buyers and the easing of industry regulation. Alone, however, it is unlikely to be sufficient to overcome a mountain of negative factors particularly as the election hovers disturbingly over the peak spring season.
Labour has been criticised for its proposed increase in National Insurance which may dampen demand despite the stamp duty holiday, its promise of more affordable homes and an agreement that banks will lend GBP105Bn to homebuyers/businesses over the next year.
The Conservatives meanwhile will make the stamp duty threshold increase permanent, end hips and let councils keep more of the proceeds from council tax/business rates on new developments to boost the market.
The Liberals promise cheap renovation loans to the owners of 250,000 empty homes to get them back into use.
A hung parliament is likely to do nothing for the industry with policy uncertainties likely to push up interest rates.
House auction prices are often seen as an early gauge as to the future of the housing market and auctioned homes are currently selling at a large discount to the conventional market suggesting that prices have yet to fully correct. Regional variances will, however, continue to apply particularly in London.
"The increase in UK house prices is slowing"
Whilst demand is likely to continue to outstrip supply there is evidence that the imbalance between the two is reducing.
Current data suggests that more people are now viewing this as a time to sell rather than buy homes and as a result this will help contain upward pressure on house prices going forward.
Quick Facts
- The average age of a first time buyer without parental help is now 37.
- In April 2008 the Halifax mortgage rate for existing borrowers was 7.25%, over twice its current rate.
- The Land Registry index, whilst more inclusive of data for homes in England and Wales, lags the Nationwide Index in terms of timing by c.one month.
- The house price to earnings ratio now stands at nearly 5.5x having peaked recently at over 6x against a long term average of 4x.
- 20% of Persimmon's new stock reflects factory-built, flat-packed homes. They predict this will rise to 50%.
- February home auction prices were 30% discounted.
- The top end second home market remains buoyant due to cash buyers and a weak pound despite higher taxation threats.
- Cornwall remains one of the hottest second home locations.
London
- London benefits from an acute shortage of homes as well as higher overseas demand. This has recently been further boosted by the weakness of the pound.
- Over the past few months the London market has also been favoured by the upturn in the financial services sectors.
- The price of the average home in the Capital differs depending on your choice of measurement. This ranges from GBP270K to GBP370K, twice the national average.
- Trends indicate strong annual growth although month on month rises are slowing with the Land Registry reporting a 0.5% fall in prices last month.
- CB Richard Ellis estimates that you need an average salary of over GBP56K to support a mortgage in London.
- With its greater number of high earners with expensive properties, London is likely to be most impacted by the forthcoming election outcome. This is due to Labour's proposed tax increases on both income and top end stamp duty.
- New initiatives in the Capital to aid homebuyers include "Pocket" homes. These represent cheap, extremely compact homes aimed at key workers.
Source...