UK Housing Market Update

UK Housing Market Update
A State of Cautious Optimism
Beyond your expectations
www.hamptons.co.uk
©Hamptons International 2011
May 2011
May 2011 Housing Market Update
Introduction
The UK housing market was a tale
of two halves in 2010. Early growth,
continuing from 2009, gave way postelection to a period of uncertainty
and stagnation through the middle
of the year. This was largely the result
of the mortgage market, which has
constrained new buying opportunities
for all but the most credit worthy buyers.
In addition, Central Government
stated clear intentions to tackle the
deficit at a time when the economic
recovery remained far from assured.
Now well into 2011 a sustained market
recovery continues to prove elusive. This
is due to the combined impacts of public
sector cuts beginning to gain traction,
stubbornly high rates of inflation and
broader uncertainty about the economic
health of many of our trading partners.
Despite early optimism at the start of
the year that UK plc had ‘turned the
corner’; it would appear that the bend
will take rather longer to traverse.
Domestic fiscal and economic concerns
have been compounded by larger
macroeconomic shocks, including the
European Union debt crisis, potentially
overheating Asian economies (notably
China). More recently the destabilising
political climate in North Africa and the
Middle East has helped to push oil prices
to uncomfortably high levels, further
straining precious household finances.
Our house price forecasts for 2011
reflected the anticipated erosion in
buyer sentiment, particularly in regions
of the UK unable to benefit from the
Economic Context
strength of the London economy.
Changes to demand are important, as
the supply of properties for sale and
therefore transaction levels remain well
below long-run averages. As a result
a small shift in buyer sentiment will
have a stronger than normal impact on
average prices in the housing market.
Recent figures seem to suggest that
the supply of properties in London
has begun to improve. This is in line
with the stronger market backdrop
for the Capital. However, the malaise
in mortgage lending and economic
recovery continues to plague residential
markets outside of the London
commuter-belt. This dichotomy is
manifesting itself in a yawning North/
South divide in house price movements;
our national price forecasts still appear
to be the central scenario, but balanced
by a more pessimistic picture for the
North and more optimistic expectations
for London and the South of England.
The Comprehensive Spending Review
in October provided households with
greater certainty about the personal
impact of austerity measures. The CSR
was followed shortly by positive Q3
GDP growth of 0.8 percent (the second
successive quarter that this figure was
well above analyst forecasts). Other
positive indicators included Standard
& Poor’s reaffirmed top rating for UK
debt and impressive growth in the
FTSE All-Share Index. Although still
tentative, these indicators provided
some sense that the nascent economic
recovery appeared to be resilient,
despite continued problems in the
United States and the Eurozone.
Unfortunately the New Year has not
brought with it the positive shift in
buyer sentiment that might have been
hoped for. Much weaker than expected
Q4 2010 performance (of – 0.5 percent)
was blamed largely on the particularly
wintery December weather conditions,
2011 House Price Growth Rate (%)
+5%
+4%
+3%
+5%
+2%
+1%
0%
0%
-1%
-2%
+3%
-4%
-3%
-4%
Adam Challis
Head of Research
challisa@hamptons-int.com
©Hamptons International 2011
-5%
United
Kingdom
South of
England
Greater
London
Prime
London
Source: Hamptons International
www.hamptons.co.uk
Housing Market Update May 2011
but in reality has cast a shadow over the
more optimistic visions for UK plc in 2011.
Annualised Wage vs CPI Growth, Monthly
10.0
8.0
6.0
4.0
2.0
2010 Nov
2010 Jul
2010 Sep
2010 May
2010 Jan
2010 Mar
2009 Nov
2009 Jul
2009 Sep
2009 May
2009 Jan
2009 Mar
2008 Nov
2008 Sep
2008 Jul
2008 Mar
2008 May
2008 Jan
2007 Nov
2007 Sep
2007 Jul
-4.0
2007 May
-2.0
2007 Jan
-0.0
2007 Mar
The VAT rise from 17.5 percent up to
20 percent was just one factor that
has negatively impacted household
balance sheets. Alongside this,
commodity prices have been pushed
up including oil, meaning that there
has been a very noticeable price
inflation reminder to drivers filling
up at petrol pumps. For households,
these factors are not being met by
significant improvements in wages.
Real wage growth (ie. wage growth
minus inflation) continues to disappoint
and as the austerity cuts begin to
bite there is likely to be only limited
upward pressure on take home pay.
-6.0
-8.0
Annualised Wage Growth
Annualised CPI
Source: Office of National Statistics
www.hamptons.co.uk
©Hamptons International 2011
May 2011 Housing Market Update
Housing Market Factors
One of the most important themes for
the housing market in 2011 has been the
widening divergence of house price
performance along geographical
lines. Our house price predictions
for this year reflect the distinct
differences we expect for the
economic recovery in the North
compared with the South of the
country. However, even these
predictions, which we first began
to highlight in August last year
have not reflectedthe degree to
which the UK can now be split as
a two speed housing market.
Regions
Peak
Trough
London
Jan’08
May’09
South East
Jan’08
Mar’09
Rest of UK
Oct’07
Mar’09
At the other end of the scale,
prime London is likely to see
continued price growth,
based on improving
financial and business
services prospects in
the City. This
included
significant
bonus payouts
again this
year,
despite
the
efforts
House Price
Movements by Region
Since Trough
2.6%
of Government to prevent these
payments while the rest of the country
is forced to deal with real belt-tightening
measures. In addition, ongoing
exchange rate weakness for the pound
sterling has supported international
demand, which made up seven in ten
buyers of Hamptons International
prime property last year.
Over the rest of 2011 we also expect the
gulf between mature homeowners and
first-time buyers to widen. Restricted
mortgage lending for high loan-to-value
purchasers will continue for much of
2011 and this has meant that FTBs will
remain limited from access to the first
rung of the housing ladder. In contrast,
purchasers with at least 25 percent
equity are finding quite attractive
lending terms at the moment.
Source: Land Registry, Hamptons International Research
There is both a positive and a
negative position with respect to
mortgage availability. On the upside,
the qualifying restrictions for new
lending are slowly easing. For example,
the proportion of FTBs qualifying
for a mortgage with less than 25
percent deposit is now above 50
percent for the first time in two years.
15.2%
10%
Land Registry House Price Movements by Region
110.0
105.0
100.0
95.0
90.0
85.0
London
South East Region
Ju
l1
0
Se
p
10
No
v
1
Ja 0
n
11
10
M
ar
10
M
ay
10
Ja
n
Ju
l0
9
Se
p
09
No
v
09
09
M
ar
09
M
ay
09
Ja
n
No
v
Se
p
08
80.0
08
As can be seen in the map and
graph of Land Registry house
prices,areas that do not benefit
from London’s economic strength
have experienced weaker house
price performance over the past
two years. As expected,
Government austerity
measures have
been harder on
northern
cities with
a greater
dependence on public sector
employment. A number of studies have
highlighted the extent to which places
such as Liverpool, Sunderland and
Newcastle are reliant on public sector
employment. Job cuts are having a
very real negative impact across these
local economies and subsequently
on demand for new house purchases.
Unlike much of the South of England,
these locations do not suffer from a
chronic shortage of housing stock and
in some cases are actually faced with a
‘managed decline’ of obsolete properties.
Rest of UK
Source: Land Registry, Hamptons International Research
©Hamptons International 2011
www.hamptons.co.uk
Housing Market Update May 2011
However, as a result of inflationary
pressures and the anticipated need for
the Monetary Policy Committee to raise
the base interest rate, mortgage rates
are beginning to tick upwards as well.
Across our market in the South of
England, Hamptons International
remains optimistic that the economic
recovery will support the housing
market. This will provide reassurance
to households looking to purchase a new
property. Perhaps more importantly, it
will diminish some of the perceived risk
that mortgage lenders are pricing into
new lending. Constricted mortgage
lending remains the single most
significant factor that is preventing the
housing market from returning to a
normal level of transactions.
Spurned first-time buyers have
remained in private rented properties
for longer, placing increased
pressure on demand in the lettings
market. As a result, rents increased
by 15 percent in 2010 according to
findaproperty.com. We do not expect
this demand to abate significantly in
2011, although improving yields are
encouraging investors to increase
the supply of rental properties.
expected to remain muted. The GDP
growth figure of 0.5 percent for Q1 2011
is encouraging after the weak end of
2010 performance.
volume to meet the current need and
normally employs over a million people.
Indicators to Watch
The strength of global demand for UK
exports remains the key to the domestic
recovery as consumer spending
will be under sustained pressure
for most of the year. As a result, the
health of the Asian and eurozone
economies remains an important
consideration, alongside the uneven
GDP growth story in the United States.
Domestically, inflation has been
stubbornly high, with CPI reaching 4.4
percent in February, but falling back to
4.0 percent in March. The MPC remains
resolute that it will continue to fall back
sharply by the end of the year. This
should help households manage balance
sheets, although wage growth is also
www.hamptons.co.uk
The March 23rd Budget offered very
little new money to support the housing
market, as anticipated. One notable
exception was the £250 million FirstBuy
programme aimed at helping first-time
buyers with up to 80 percent of deposit
requirements on new build property
purchases. If fully subscribed it will
contribute to 10,000 new house sales
and between 11,000 and 15,000 jobs in
the housebuilding industry. A boost, but
hardly the long-term solution for this
sector that would need ten times this
Taken together, we continue to
anticipate a flat picture for the volume
of house sales in 2011. Prices are likely
to follow, with modest improvements
or declines being determined by
exposure to either expanding private
sector employment, largely in the
South, or disproportionate public
sector job losses. There is significant
macroeconomic volatility that could
still alter this view, but this central
scenario should form the platform for
a slow but broad-based improvement
for the housing market in 2012.
©Hamptons International 2011
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