Building Societies Association
Feature
Mortgage market outlook for 2012
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Contact: Joseph Thompson Date: 20 Dec 2011 |
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2011 has been a relatively quiet year for the housing market. House prices have remained broadly flat, although with regional variations. The outlook for the UK economy has deteriorated since the summer, and the fundamentals underpinning the housing market are now weaker. Surprisingly the results from the BSA’s December Property Tracker, show that despite gloomy economic forecasts many people (44% of respondents) still consider it a good time to buy a property. This is up from the first quarter of 2011 when 41% of the 2,000 plus respondents felt it was a good time to buy (see table below).
A stable but subdued housing market
Both low levels of demand from buyers, and a lack of supply of properties to the market has resulted in house prices in most regions moving sideways over the past twelve months. Consequently the number of property transactions in 2011 has remained low, and is on track to be marginally below the 886,000 completed in 2010. The Government’s recently announced New Build Indemnity Scheme should give a small boost to transactions over the coming year, however, given the current outlook for the economy the total number of transactions is likely to remain relatively similar to those seen over the past two years.
According to the Land Registry, prices were 3.2% lower at the end of October compared to a year ago. Other house price indices point towards moderate price growth, but by any measure, house price growth has been close to zero in 2011. The average independent forecast for house prices in 2012 is again for no growth, which corresponds to the median forecast of respondents to the BSA Property Tracker in December. However, even if prices do rise over the next twelve months, due to relatively high (if declining) levels of inflation, in real terms prices are likely to fall next year.
Levels of arrears and possessions have been surprisingly low over the past two years, and have in fact reduced steadily since the start of 2010. This has helped to support house prices, but has been made possible in part by mortgage lenders offering extended forbearance to borrowers in financial difficulties. Lenders cannot forbear on individual cases indefinitely, and if the financial position of a borrower worsens or interest rates rise, the level of arrears and possessions may begin to increase in 2012, which could have a knock on effect on property prices.
A weaker economic outlook
The deterioration of conditions in the labour market is of particular concern for the housing market, and the economy more widely. The unemployment rate had, up until June, remained relatively stable and below 8.0%, but by the end of the third quarter of the year it had hit 8.3%, the highest rate since 1996. The Office for Budget Responsibility forecasts that the unemployment rate will rise further to 8.7% by the end of 2012. In addition, wages have grown below the rate of inflation over the past year meaning real disposable incomes have reduced. If unemployment continues to rise, the effect this could have on consumer spending, housing market activity, and economic growth could be significant. Consumer sentiment is at least in part driven by feelings of job security, and the December Property Tracker recorded that 54% felt that this factor was a barrier to buying a property. There is also growing concern over the level of youth unemployment, which reached a record high of 22% in the three months to October. This could have far reaching consequences for the mortgage market past 2012.
Despite the low interest rate environment and the extension to the Bank’s quantitative easing programme, on balance it would appear that the weak economic fundamentals faced in 2012 will quash any growth in demand across the economy. Consequently, activity in the housing market will remain subdued, and prices flat. Households are likely to remain cautious until the economic conditions show signs of improvement, and this may not happen for some time. Additional risks stemming from the Euro zone are also present. If Euro zone economies enter a period of extended recession the outlook for the UK economy could deteriorate further.
