Building Societies Association
Feature
What next? House prices in 2010.
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Contact: Joseph Thompson Date: 29 Jan 2010 |
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What happened in 2009?
A number of institutions chose not to publish a house price forecast for 2009, and in light of developments that has proved to be a shrewd move. Contrary to the consensus view of a double digit retraction in house prices in 2009, average prices ended the year 5.9% higher compared to the end of 2008 (Nationwide HPI), primarily because of a reduced number of properties being put on the market.
The supply of properties for sale contracted throughout 2009 as would-be sellers opted to sit tight until the market stabilised. The number of forced sales was also relatively low due to the Bank Rate being cut to an unprecedented 0.5%. In addition, house building activity continued to reduce which further restricted the number of properties coming to market. The demand for properties rebounded, and despite a severe reduction in the availability of mortgage finance, cash rich ‘prime borrowers’ were still able to secure financing. As confidence slowly returned to the market and mortgage availability improved to some degree, an amount of ‘pent up demand’ was released, helping house prices to rise.
Forecasting House Prices in 2010
House price movements in 2010 are equally difficult to forecast as they were in 2009. The UK economy is slowly moving out of a period of recession and consumer confidence remains weak. Consequently the housing market will remain very fragile over the coming 12 months until sentiment improves and market conditions stabilise. The average house price forecast is for a 1 percent reduction in prices by the end of 2010, however some analysts predict even greater falls, of up to 10 percent. Others, however, predict rises of up to 6.5%.
The table below summarises published forecasts for house price growth from January 2010 to December 2010
Market Conditions in 2010
A lack of properties being put on the market was identified as the main driver behind the recovery in house prices in 2009, and prices could continue to rise in the first quarter of 2010. The RICS sales to stock ratio (a measure of slack and a lead indicator for prices) remained high in December at 30.5% due to low levels of stock on surveyors’ books. Stock levels were 19% lower than December 2008, and down 31% on their peak in February 2008.
The ability and willingness of institutions to provide mortgage finance will play a significant role in shaping house prices in 2010. In the last quarter of 2009 a net balance of lenders reported that the availability of secured credit to households had increased somewhat which in part was attributed to improved prospects for house prices and a more positive outlook for the economy. If all else remains equal we can expect the flow of secured credit to households to increase moderately in 2010 as lenders take on selected new business.
Sluggish house building figures in 2009 also reduced the number of properties available for sale. Housing completions (seasonally adjusted) have declined every quarter since Q1 2008 and in Q3 2009 were at their lowest level since 2002 at 27,000. In the longer term, the low level of housing stock in the UK will put upward pressure on house prices.
Survey results from RICS and the Bank of England’s Q4 2009 Credit Conditions Survey suggest that the demand for house purchase is relatively strong compared to the weakness on the supply side. RICS reported that new buyer inquires rose for the 14th consecutive month in December, although the increase in December was at it’s slowest pace since January 2009. And the Bank reported that lenders, contrary to their expectations, saw an increase in demand for secured lending in the last three months of 2009. Of those surveyors who took part in the RICS survey, 13% anticipated house prices to rise further in the first quarter of 2010. If current levels of demand are sustained and the supply of housing remains weak, a continued rise in prices may well occur.
Barriers to house purchase
Consumer sentiment is key to a healthy housing market, and the rise in prices in the second half of 2009 helped to restore some confidence. However, further weakening of the labour market has the ability to derail the recovery. Although recent data suggests that unemployment is not rising by as much as might have been feared (possibly because workers have accepted reduced pay or hours, or have taken up part time work or study rather than full time work) we are likely to see unemployment rise further in 2010, especially if public sector cuts are made, and earnings growth will be subdued in 2010. Homeowners also face the prospect of increased taxes and the possibility of the Bank Rate rising, which if combined with rising unemployment would result in downward pressure on house prices.
The Bank is particularly concerned with the uncertainty over credit supply, but on balance it believes that the supply of credit to households may improve somewhat but will remain weak over the next 12 months. This will bear down on spending and house price growth.
Low interest rates are helping borrowers to pay their mortgage, and although recent house price falls have improved affordability, raising a deposit will remain a significant barrier to house purchase as it has been throughout 2009. The BSA Property Tracker shows this is considered one of the greatest barriers to buying property, with 56% citing it as a barrier. Over the next 12 months firms will continue to lend cautiously, particularly at high loan-to-value ratios, and mortgage spreads are unlikely to reduce to pre-credit crunch levels as lenders price in risk more appropriately. Consequently, buyers will struggle to raise deposits and secure mortgage finance at levels they can afford.
Conclusions
Although there is great uncertainty, house prices across the UK are unlikely to grow strongly in 2010, the average prediction is for prices to decline by about 1% over the year. Demand for house purchase is likely to be constrained by the weak labour market and stretched household finances, as well as the relatively restricted availability of mortgage finance. The recent pick up in prices might encourage more properties to be put up for sale, further reducing the upward pressure on prices. Should interest rates rise toward the end of the year, payment problems would be likely to increase. While the ongoing shortfall in the supply of housing in the UK, which the recession has exacerbated, adds support to prices, the market is in a fragile state, and during this period prices will be extremely sensitive to changing market conditions and consumer sentiment.
