Changing the rules of the game

By a stroke of luck, just as I was about to put pen to paper to write this article, a raft of new and interesting data was published about the housing market, showing clear signs of changes in the UK market.

One thing that remains unchanged is the difference in the surveys and there are clear variations beginning to show in the direction that the market is likely to take. Some of this will be as a result of more recent events. A new factor is that the recent events in the global credit markets have put an entirely different perspective on the property market.

Setting the tone

It is worth taking a quick look back at events through this year. 2007 has set a new tone of rising interest rates following through from 2006, with continued, but lower growth in house prices. The further price rises over the course of 2007 have stretched affordability to breaking point. The rate rises have had a cooling effect on the rate of house price increases. Nationwide figures show that, as of August 2007, annual price increases were at 9.6 per cent with a monthly change of 0.6 per cent. Average house prices are now at £183,898.

This should be set against a background of the Royal Institute of Chartered Surveyors’ (RICS) House Price Index for August 2007. The RICS index fell by 1.8 per cent from a downwardly revised 10.8 per cent in July – the first negative reading since October 2005.

It reports that enquiries from potential buyers fell for the ninth month in a row and at the fastest pace since August 2004, while newly agreed sales fell for the third straight month at their fastest rate in three years. This has translated to house prices falling in eight of the 12 UK regions, while London saw the strongest price growth in the country.

The ratio of completed sales to the stock of unsold property, seen by many economists as a more reliable indicator of demand, increased to 37.6 per cent in August from 37.1 per cent in July, suggesting market conditions had tightened over their long-run average. The RICS outlook is tempered by its view that it expects house prices to ‘soften’ during through the Autumn.

Another benchmark survey is the Land Registry House Price Index. While not as up-to-date as the other surveys, residential property transactions for London that completed in July 2007 indicate continued monthly growth. With an annual price change of 15.5 per cent, London still leads the rest of the country in terms of house price growth. The July data shows that for the fourth month in a row, the rate of increase for London house prices remains around 6 per cent per annum greater than that of England and Wales as a whole. London’s average house price for July 2007 stands at £342,936, whereas the average price for England and Wales is £181,460.

Regional divergence

One thing that is known is that house prices are beginning to diverge regionally. The pressure on the South East of England has, many believe, been powered by the bonus structure in London. The size of the bonuses has skewed the South Eastern property market via the ripple effect. Recent figures bring into the spotlight the massive divide between England and Wales’ two housing markets. The effect of City bonuses and an influx of Eastern European and Middle Eastern money are keeping property values buoyant. Prices in Kensington and Chelsea have risen by 30.9 per cent in the past year.

Meanwhile, prices fell in the West Midlands, Yorkshire and Humberside and Wales for a second month in a row. Experts say it is almost two years since house prices had fallen in at least three regions for two consecutive months. It is apparent in the current climate that City bonuses will be, at the very least, curtailed, and therefore very likely that South East property prices will be affected.

Robust investments

There are signs that the investment market remains robust. Demand for rented property has been rising as current levels of property prices are forcing potential buyers to remain in rented accommodation. The result is that rents are rising at their fastest rate on record. Meanwhile, buy-to-let (BTL) mortgages have surged over the past three years. In the past three years, the number of BTL mortgages in existence has nearly doubled to 939,000, and they now comprise 10 per cent of all outstanding mortgages. Experts have blamed rising house prices and rents on the shortfall in new homes being built.

The Association of Rental Letting Agents reported that rents have now risen to an all-time high. The average weekly rent for a flat in prime central London is now £525 a week, with £215 a week being charged in the South East and £150 in the rest of the UK. The growing influence of BTL investors, with more financial muscle than the typical first-time buyer, helps explain why house prices in the UK are still rising, despite the Bank imposing five rises in interest rates since Summer 2006.

Then and now

That was the recent ‘then’, the ‘now’ is all of a sudden very different. However fast forward just a few weeks to early August, and the global markets have been thrown into chaos by a credit crunch. The global background has simply changed virtually overnight. The immediate effect was the postponement of a much mooted Base Rate rise to 6 per cent. While a relief, it must be seen against the backdrop of the turmoil in global markets. All of a sudden, the rules of the game have changed.

The key drivers in the property market are both consumer demand and a good supply of mortgages. I’m not saying for a moment that this will change, but the signs of pressure are there. The immediate signs are the costs of borrowing are beginning to rise with lenders increasing mortgage rates, plus LIBOR has widened to 6.90 per cent, significantly more that, Base Rate.

All will add to the pressures on borrowers and especially so during the rate rises of earlier in 2007. Lenders in both the mainstream and the non conforming markets are re-pricing their ranges. No one is immune from this turmoil. All these factors will conspire to have the effect of slowing down the demand for housing. The general feeling is that this will only be for the short term, but things will have to change quickly for the effect of the crunch to be minimised. However there will be significant disruption to normal market conditions.

The outlook for house prices in that last quarter of 2007 are very different from the first three quarters. We all await to see the full extent of those changes. We live as they say, in interesting times.

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