The UK economy defied the consensus expectation of a slowdown last year following the Brexit vote, and fears for the housing market were not realised. The last few months have reignited concerns about both, however, and the news that the Bank of England is now split on whether to raise interest rates ( a 5-3 vote to maintain the status quo) won’t help.
House prices have certainly cooled. The Nationwide index for May showed annual house price inflation at 2.1%, the softest pace in four years, with a clear slowing trend; the index has now fallen for three consecutive months, by a total of 0.9%. The picture from the Halifax index is similar, with annual inflation slowing to 3.3% in May, from 6.5% in December. Both indices are based on mortgage lending and the Office for National Statistics (ONS) publishes a broader but less timely measure, based on Land Registry transactions, which shows an annual rise of 5.6% for April, albeit also pointing to a slowing trend. The RICS data, based on a survey of chartered surveyers operating in the residential market. also reveals a softer market. with a net 17% of respondents in May expecting prices to rise, the weakest reading since the summer of 2016. Buyer and seller inquiries were also seen to have cooled.
Are UK house prices excessive? The average price in the UK is now £209,000 according to the Nationwide, or 48% above the cycle low in early 2009. Prices are also now well above the previous peak ( £186,000) and are 5.3 times the income of First Time Buyers (FTB) against a long run average of 3.6. However, interest rates are unusually low; the standard variable rate is over 4% but the effective rate on new mortgages is around 2% according to the BoE, reflecting discounts and lower fixed rates. Consequently , affordability measures do not suggest prices are overvalued; the Nationwide data, for example, shows mortgage payments at 33% of FTB income, bang in line with the long run average. Indeed, for most of the UK regions affordability is much better than the norm, the exception being London, although non-resident purchasers are more significant in that market.
The supply of housing in the UK is widely thought to be persistently short of the demographic requirement, but completions also fell sharply after the crash, declining to 107,000 in England ( which has the most timely data) from 170,000 in 2007. Completions have picked up again, in response to higher prices, rising to over 140,000 in England in 2016, and the housing starts data points to a higher total again this year. Yet few argue that supply is still anywhere near demand.
Net mortgage lending has been growing, in contrast to Ireland, although at a modest pace relative to historical exerience, but now also appears to be slowing, with annual growth at 2.8% in April against over 3% for most of the past year. Mortgage approvals for house purchase, a more forward looking indicator, fell below 65,000 for the first time in six months in April.
This all may relate to uncertainty about Brexit and the short term economic outlook, with the election result also likely to weigh on sentiment. In our view the likelihood of a more prolonged and sustained period of weakness depends upon the labour market, which to date has held up remarkably well; the employment ratio is at an all-time high, while unemployment is still making new cycle lows. One suspects that UK lenders and the Government would only become seriously concerned about the housing market if cracks started to appear in employment.