Housing market watch
Recent headlines about Britain’s housing market have been extremely upbeat. Prices are rising in large parts of the country, mortgages are flowing more freely, and increasing numbers of first-time buyers are returning to the market. Encouragingly, a glut of recent data suggests these trends will continue.
The number of mortgage approvals for house purchases – a solid leading indicator for the market – increased by 4% between June and July to over 60,000 – the first time approvals had topped the 60,000 mark since early 2008. In September approvals surged to 66,735. As for house prices, the Land Registry’s latest survey said average UK prices rose by 1.3% in the year to August, and by a huge 7.1% in London – although some boroughs have risen by even more and have now passed their pre-crisis peak – and the Land Registry’s figures are among the most conservative of all the housing surveys. All of which seems to suggest that we are heading back to a more ‘normal’ housing market in terms of price increases and transaction levels.
The worrying point for me is that the context for this recovery is anything but ‘normal’. In fact, it is unprecedented.
We have interest rates set at their lowest level for 300 years by the Bank of England and two unique ‘interventions’ by the government to boost demand: the Funding for Lending scheme, which has increased lending by banks and helped reduce mortgage rates; and the Help to Buy scheme, which is essentially making up for the fact that most buyers don’t have big enough deposits to buy a home.
The first phase of this Help to Buy scheme offers help to buyers of newly-built properties valued up to £600,000 who have a deposit of as little as five per cent. The second phase, which extends to both new and old properties and beyond first-time buyers to those who are trading up, provides guarantees for mortgages on properties also worth up to £600,000. It was launched in September. These schemes will have short-term benefits, not only for the buyers that they help, but for the vendors, who will be able to charge higher prices as a result of the government assistance.
But such one-sided measures are worrying. Economics is a science of supply and demand, yet the government has concentrated virtually all of its efforts on the demand side with barely a nod towards boosting supply. This is not a balanced policy.
In addition, we have had Mark Carney, the new governor of the Bank of England, announce in his new policy of ‘forward guidance’ on interest rates, that the current historically low base rate will be maintained until unemployment hits 7% – down from the current level of 7.9%. On most projections, that gives us one to two years until rates rise.This, again, is a big boost for buyers, who will interpret this as giving them a couple more years of historically low mortgage rates as yet another reason to rush into the market.
Now, what we need – perhaps more urgently than ever – is a steady stream of new homes to accommodate Britain’s burgeoning demand.
Let me clarify this point; around 240,000 new households were created in the UK last year – that is new single people or families looking for a home – and yet fewer than 111,250 properties were built, according to statistics from the National Housing Federation. Figures have risen slightly in the first quarter of 2013 compared to the same period last year, but only around 127,000 homes will have been built by the end of the year if house building continues at its current pace, which still leaves us 113,000 homes short.
This shortfall needs urgent attention with new policies needed to incentivise builders and reduce red tape around planning applications.
There are hundreds of thousands of vacant properties around the country, together with innumerable inner-city sites that could be used for building. I’m also a fairly outspoken advocate of building on some of the UK’s green belt. But however we do it, we need the building process to become less onerous on developers otherwise this trend of under-building will continue and that will only increase the risks of creating a housing bubble.
Having said all of that, there is no need to panic. We are a long way from seeing a bubble just yet. London is steaming ahead in terms of prices, but the capital’s housing market is virtually in a world of its own, subject to wildly different forces than the rest of the country. Recent research by Savills suggested that the existing Help to Buy scheme had virtually nothing to do with the recent price rises in the capital, and that equity-rich Londoners and cashed-up foreign buyers were in fact responsible. It certainly chimes with what I’m hearing about transactions in London.
In the rest of the country, price rises are far more subdued. Research by the Land Registry shows that in many parts of the North, the Midlands and Wales, prices are still flat or even declining. Indeed, with house prices still effectively falling in real terms (once inflation is taken into account) in even larger swathes of the country, or rising only marginally, talk of a bubble is extremely premature.
Time to buy?
So what are the prospects for buyers entering the market today? Despite my concerns in the longer term, I still maintain now is a good time to buy, but only after detailed research about trends in the precise locality you are intending to live. Too often, buyers look at the UK average price increase and draw inaccurate conclusions. Today’s market is as fragmented as the economic recovery so buyers should proceed with caution. And whether you are an owner-occupier or an investor, it is key to remember that the days of making a fast buck are probably far behind us.
If you are buying a home, look for somewhere that you would be comfortable living for five years or preferably longer. This way you will maximise the chances of being able to ride out any shorter-term volatility in house prices. If the economy improves more quickly than anticipated we could see interest rates rise much sooner than expected, and this could have a drastic effect on house prices, potentially reversing some of the recent increases.
But let’s give ourselves some perspective, just to illustrate why we should not be too greedy in terms of our expectations about house-price increases. Historical data shows that house prices rose by 16% a year between 1995 and 2005, and a further 21.8% between 2005 and 2007. Given that wages of full-time men were rising by an average of 6.1% over the same period, and have failed to keep up even with inflation for most of the time since the recession, such property-price increases were clearly unsustainable.
It stands to reason that after such a sharp run-up in prices (and even without the credit crunch that pre-empted the crash) some kind of correction had to happen. And so I would actually welcome a flat or moderately rising housing market that gave real wages a chance to catch up and make property more affordable. After all, the best way to avoid a nasty correction when all of this “buyer stimulus” is removed is to build enough new properties to satisfy demand.
If we’re lucky, a healthy and growing economy – and the naturally rising demand that comes with it – could fill the void left by the withdrawal of the help to buy schemes, and give us a soft landing rather than a crash. It is going to be a difficult trick to pull off, but if we boost supply now, it might just work.
Charles Haresnape is managing director of residential mortgages at Aldermore Bank