he British public has a fascination with house prices, and it is no wonder. There are some 18 million home owners in Britain and millions more trying to get onto the property ladder. Unlike many European countries, we are a nation of home owners, and those of us who don’t own property aspire to it. So we pay attention to the media when the spotlight is turned on house prices.
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But to say that recent housing market comment has been somewhat contradictory is an understatement. Research spells boom, research spells bust. No wonder the headlines are changing from day to day.
So is the property market slowing?
Hit by the hikes
In recent weeks, data has emerged that indicates that yes, the property market is slowing. Borrowers have been hit by a series of rate hikes since last August, raising monthly mortgage repayments by around £140 since the same time last year – this is inevitably starting to bite.
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As consumers have become increasingly stretched, more have turned to the non-conforming sector for their mortgages. In an environment where people are so certain house prices will rise, it can seem like a no-brainer to buy property, even if you have a bad credit history. The non-conforming market has become big business and new entrants are investing in the sector. We are still far off the situation that arose in the US, but the fact that non-conforming is thriving is not necessarily great news for the stability of the housing market.
Mortgage approvals are a good indication as to the health of the market, and over the past three months volumes have fallen dramatically. Rising income multiples have made access to finance easier – with interest rates structurally lower than the bad old days, it does make sense to see higher multiples. Even so, rising rates and rising prices have made the cost of borrowing unaffordable for many – this is undoubtedly having an impact upon demand for housing.
The Royal Institution of Chartered Surveyors has already reported a slowdown in buyer interest. The number of home buyers attributing rising house prices to a lack of supply has nearly halved since January according to our research. As demand has dampened, the imbalance between buyers and sellers has been redressed to a certain extent. Prices which have been fuelled by a lack of supply will begin to slow. Indeed, in many parts of the country, they already have.
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The regional breakdown of the market shows a two-speed UK. The Land Registry’s April data showed that house prices in the North, Yorkshire and the South West have fallen slightly. However, the housing market in London and the South East is bubbling – the wealth from the financial markets of the City isolating it from the rate hikes and borrowing costs – and prices continue to rise. This is distorting the average house price inflation for the whole country.
Not cause for concern
The UK property market is definitely cooling, but it is not cause for concern just yet. Monthly inflation across the UK was 0.6 per cent prior to the May rate rise and annual inflation remains high at 9.1 per cent. The house price growth of 2006 was not realistically sustainable and the Monetary Policy Committee (MPC) has acted appropriately to stem the boom. Hopefully they have prevented a bust. The cooling that we are witnessing at the moment is a controlled moderation of an over-inflated market. The difficulty is that the MPC is trying to control general inflation too and that may require interest rates that are too tight for the housing market.
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The economy is still growing, unemployment is low, wages are rising, and debt delinquency, although on the rise, remains at very low levels. Confidence in the housing market is slipping, but people are still optimistic. Our research shows people still expect growth of 6 per cent for the next year. While people continue to believe in the value of bricks and mortar, it is unlikely they will cease to invest in property.
Optimistic
The overall diagnosis is optimistic, but it is time to give the housing market some rest. As we have witnessed over the last few months, it takes several months for interest rate hikes to filter through and directly impact on house prices. With CPI and consumer spending so high, some analysts are predicting that rates will reach 6 per cent by August. This could lead to a much more dramatic reaction from the housing market.
With rate hikes and the Home Information Packs fiasco to contend with in recent months, the market needs time to settle and find its new level. If the MPC puts rates up again without pausing to let the most recent hike take effect, the future of the UK housing market may not be so positive – and the headlines will only get worse.
