Dr Peter Williams, housing market specialist and Chairman of Acadametrics, comments:
“The average price of a home in England & Wales at the end of June now stands at £219,365, a level last seen in January 2010 and a -0.8% reduction on May. The modest gains in house prices over the last eighteen months have therefore disappeared, although the June 2011 price is still significantly higher than the £200,234 reached at the low point in the last recession (April 2009).
“The fall of -0.8% in prices in both May and June is a relatively big monthly change in today’s market, although not by historic standards. The fall in prices has probably been driven by the reduction in the number of high value sales in these months, as a consequence of sales being brought forward, during March and the first five days of April, to avoid the extra 1% stamp duty on properties costing £1 million or more which came into force on 6th April 2011. Figures produced by Land Registry show that there were 805 properties sold in March 2011 having a value in excess of £1 million, of which 517 were located in Greater London. This number of sales of high value properties represented a 58% increase over March 2010 levels, with the increase in properties selling for £2 million or more showing an 87% rise. We estimate that this increase in high value sales increased the LSL/Acadametrics average house price by approximately 1.1% in March. Table 1 indicates that prices would have fallen in March had it not been for the surge in sales of these high value homes.
“Looking at the Average Annual Change in Prices by Region over the last 3 months (see Figure 4) we note that eight of the ten regions in England & Wales are recording price falls, with only the South East and Greater London remaining in positive territory (probably still influenced by the number of high value homes sold). There has been much comment in the press of the North/South divide in price terms and the relationship between prices and the health of the underlying regional economies. However, although Figure 4 points up the clear differentials in regional price movements, we note that, in transaction terms, it is the Northern Regions that have been making the running over the last three months. Table 2 shows that transactions in Yorkshire and Humberside rose by 14% in the three months March to May 2011 compared to the preceding three months, with Greater London transactions only increasing by 2% over the same period. It should be noted that the figures quoted are not seasonally adjusted; on average one would expect an increase in transactions of 15.5% between the winter months of December, January and February and the spring months of March, April and May.”
“Supply and demand is at work here, with a fall in prices in the Northern Regions being matched by relatively large increases in transactions, whilst a rise in prices in the South East and Greater London is associated with a decline in transaction numbers, in seasonally adjusted terms. There may also be an element of false expectation in the South East and London regions; sellers, having read about the rise in prices in the central London areas, are perhaps looking for similar gains when placing their properties onto the more general market, but are failing to attract buyers.
“The decline in the sale of flats over the period shown in Table 3 is symptomatic of three factors. Firstly, as our recent ‘Focus on Flats’ (February LSL/Acad HPI) analysis showed, 65% of all flats sold in England & Wales are located in Greater London and the South East and, with seasonally adjusted transactions in these areas in retreat, the number of flats sold has followed suit. Secondly, first time buyers are typically associated with the purchase of flats and their current difficulties in obtaining finance is having a marked effect on this sector of the market. Thirdly and lastly, the rate of turnover of flats tends to be higher than for any other property type. This means that it is the flat owners who are most likely to have purchased a property in the last five years and be looking to sell again. However, being more likely to be subject to negative equity (see our ‘Focus on Equity Gains’ at the end of this news release), such flat owners may be unable or unwilling to sell at a lower price than that originally paid. This would result in prices remaining static coupled with a fall in the number of transactions.
“Although Stamp Duty changes have resulted in prices falling more sharply over the last two months, our analysis has underlined the generally flat nature of the market in successive months, albeit with important regional and local variations. However, going forward, there is considerable uncertainty as to whether even this market can be sustained. A significant squeeze on household budgets is underway given high inflation, rising taxation and falling real incomes. If the economy’s growth slows as many expect, these pressures will intensify. Rising incomes and confidence are important drivers of the housing market along with the cost and supply of credit. Recently the Bank of International Settlements has called on the UK’s Monetary Policy Committee to start increasing interest rates whilst the June 2011 Bank of England Financial Stability Report highlights the risks to the household sector that might flow from any rise in rates alongside the risks of increased debt derived from earlier lender forbearance and any negative equity. Indeed, the Chief Executive of UK Asset Resolution (the body created by government to hold mortgages from collapsed banks) warned of a wave of home repossessions should there be a rise in rates. The tension here is clear with the authorities caught between the proverbial ‘rock and a hard place’. Time may ease these tensions or may exacerbate them.
“At the same time and over the longer term, the Office for National Statistics has recently announced that net migration in the United Kingdom rose to 242,000, for the year ending September 2010, and is now at the highest level since the year ending June 2005. Since most new migrants, lacking a deposit and/or the credit score history which the lenders increasingly use as the basis for lending decisions, are unlikely to buy property on arrival, this net migration is unlikely to have put upward pressure on the housing market itself, but it will have increased demand for rental accommodation. In the longer term, however, positive net migration, increases in birth rates and in family size and the fact we are living longer all put pressure on the housing stock.
“A report by the LV= (Liverpool Victoria) Insurance has forecast that, by 2025, the average age of first time buyers will be 41, up from 38 today, with all the wider consequences that this has in terms of family formation. The recent Halifax Generation Rent report highlighted the pessimism of younger households about buying a home. In combination with the ONS figures, these underline the serious pressures that are building. The Government is due to hold another first time buyers’ summit and we can anticipate further announcements by both government and industry in support of the market. Will such measures, alongside a restored mortgage supply and flat or falling prices, be enough over the medium term to restore affordability and a ‘normal’ functioning market? Probably not; but without doubt the current challenges are considerable and building.”
“We estimate that housing transactions in England & Wales in June 2011 will total 61,000. Whilst this level is 20% higher than May, with a ‘typical’ year normally seeing a 7% increase between the two months, the May figure was unusually low. Indeed at 61,000 transactions this will be the second lowest volume of sales for June since the Land Registry computerised its records in January 1995. Over the last twelve months transactions have been running at approximately 61% of the long term average, with our estimate for June being consistent with this trend.”
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