UK housing market insulated from global financial jitters

There is evidence that the unique upside factors of the country’s housing market have found an uneasy balance with the downside risks, which may well insulate it from major price falls or further deterioration in transaction volumes in spite of the ongoing financial crisis.

Miles Shipside, director of Rightmove comments: “While the world’s financial jitters are now playing havoc with stock markets and our future pensions, there are bound to be concerns about the impact on assets held as bricks and mortar. While the repeated shocks to the financial system have severely limited transaction numbers compared to pre-credit-crunch levels, the last four years have seen them stabilise, with an uneasy balance developing between those that have a pressing need to sell and those that have a good reason and the capability to buy. Sellers’ initial asking price aspirations have remained remarkably stable, and in spite of the continuing global economic unrest, the UK housing market has
several unique factors that should help to insulate it from downside risks”.

This month, new sellers’ average asking prices have dropped by 2.1%, following the post-credit-crunch pattern of falls in August that has remained consistent since 2008. However, although this is the fourth year of economic uncertainty, the average price at which new sellers market their properties remains in the same ball-park when compared to both last year and the onset of the credit crunch in August 2007.

These figures show that the country has avoided the downward spiral of widespread price slashing that has been a common feature of the property downturn in many other countries with similarly highly geared housing markets. While local conditions vary, overall the upside factors that are unique to the UK mainland look set to continue the awkward but stable status quo.

Shipside adds: “We’re in a ‘limbo-land’, where a restricted number of motivated sellers are trying to match themselves up with the similarly restricted number of financially capable buyers. In many parts of the country transaction levels are limited to the number of sellers who are willing to price aggressively below the competition and can afford to do deals. It seems that this stalemate can continue indefinitely, until it is broken either by an improvement in upside factors, such as a relaxation of mortgage finance, or by a further marked deterioration in employment and a corresponding increase in forced sales at bargain-basement prices.”

The upside factors that are restricting supply are:

– Supply of new sellers remains subdued at 30% below August 2007 levels, as lack of confidence and/or ability to come to market stops an oversupply of sellers from bidding each other down;

– Bank of England base rates now look set to remain unchanged until at least 2013. As well as helping those whose finances have deteriorated to service their debts and remain in their homes rather than becoming forced sellers, it is a further boost for deposit-rich buyers. Their mortgage rates are set to remain historically cheap, helping to fund their trading-up or other housing investments. This may include expansion of buy-to-let portfolios to satisfy demand from the growing number of new households, which is also encouraged by the poor returns available on most other types of investment;

– Supply of new-build properties is falling further and further behind the increase in the number of households. The UK is currently building fewer than half as many new homes as its demographics require, meaning the backlog is growing at an alarming rate;

– Mortgage approval levels have been running at a monthly average of just under 50,000 for two consecutive years, and so seem to be offering a consistent, albeit constrained, level of funding.

However, there still remain some downside risks for the housing market, which may yet lead to more significant falls in house prices:

– Employment levels have thus far remained stronger than expected in the economic downturn. However, a renewed slowdown in the global economy driven by concerns about sovereign debt in the Eurozone and the United States could lead to more widespread unemployment. This in turn would both reduce the number of buyers willing and able to
proceed and result in more forced sales, undermining prices in the surrounding market. Lender forbearance has been assisted by a low interest rate environment limiting the growth of arrears, plus the degree of property price resilience. Should that resilience begin to falter and undermine the value of their mortgage book, it will force lenders to adopt a
harder line, leading to more forced sales and a vicious circle of further price falls;

– A further increase in sovereign debt risk would again undermine trust in the banking sector, leading to restricted inter-bank lending and an increase in inter-bank interest rates. This renewed credit squeeze and increase in the cost of borrowing would then impact mortgage availability and rates and drive down the number of buyers;

– The Bank of England could increase base rates prematurely, driving many struggling homeowners over the edge into forced sale or repossession;

– Further unanticipated shocks to the financial sector could also heighten individuals’ concerns over their personal finances and damage market sentiment, leading to short-term periods of buyer paralysis.

Shipside comments: “We are four years into this journey, and it still looks like a long road ahead. The UK does not have the chronic over-supply of property seen in many other countries, due to restrictive planning laws and tight central control of local government finances, leading to low levels of new build in both social housing and the private sector. Demand for housing is high due to demographic changes, including net immigration, boosting household numbers. These factors give our housing market more balance and stability, but perversely prevent a possibly quicker but more painful route to recovery via lower prices with higher transaction volumes.”

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