UK housing market update

UK house prices followed a broadly flat growth path in 2012. We expect house price growth to remain unspectacular this year too as there has been no change in underlying fundamentals that will drive the market forward. Weak labour and credit markets will remain a drag on housing market activity but ultra-low interest rates will ward off any rises in repossessions and forced sales.

The latest seasonally adjusted Nationwide house price index shows that UK house prices were marginally up (0.5% m-o-m) in January and unchanged from a year ago. Halifax reports house prices as being up 0.6% in 2012q4 after six consecutive months of decline on this three-month measure. Clearly, house prices have failed to gain momentum in any direction. For the last year, prices have trundled along an essentially flat growth path with no change in underlying fundamentals that could establish a sustained pattern of growth. Our view is that 2013 promises to be another such uneventful year as house prices follow a broadly flat growth path and activity rises only marginally.

On the one hand, there are some trends that could underpin buyer interest and ability to afford a property. Already there is some evidence that mortgage lending has picked up as a consequence of the government-sponsored Funding for Lending Scheme. Bank of England data show that the number of loans approved for the purchase of houses was slightly up in November at 54,036. While nowhere near peak levels, this is still an improvement over the previous six-month average of 49,206. There are also signs that mortgage lenders are beginning to offer more competitive rates, especially with players like Tesco and Co-op entering the mortgage market.

Even so, there are still headwinds to a rebound in buyer demand. First, while mortgage rates may be gradually becoming competitive, there is no escaping the large 15-20% deposits now required by banks as the norm. Saving for a large deposit when household finances are still under pressure is a difficult task keeping many buyers out of the market (despite FirstBuy and NewBuy).

Second, even though affordability has improved, the average price of a house relative to earnings is still high. Nationwide estimates the UK house-price-to-earnings ratio at 5.1 and mortgage payments at roughly a third of take-home pay. With annual inflation still outpacing annual wage growth and the weak economic outlook threatening job security, we expect buyers to remain cautious this year. Nonetheless recent RICS surveys have reflected a broadly stable price picture, increases in buyer enquiries and higher transactions which is an encouraging sign that demand will at least hold up (rather than fall).

Supply side factors are playing their role in preventing steep falls in house prices. Ultra-low interest rates have meant that repossessions have been subdued. Indeed the number of mortgages in 3-month arrears has been falling and loose monetary policy will ensure this continues. Also, the pace of home-building is far outpaced by the rate of household formation, another factor providing support to house prices and preventing them from falling more steeply than would be expected given a weak economy and house prices that are well above their long term rate of equilibrium (relative to incomes). Overall, we expect an annualised decline of 0.4% in UK house prices at the end of 2013.

London’s housing market continues to outperform the other regions although the pace of its house price climb has slowed recently. Our outlook is for the capital’s housing market to cool but still perform ahead of national benchmarks.

Admittedly, there remain several factors supportive of house price growth (a larger proportion of overseas and cash buyers compared with the rest of the country, a fairly fixed housing stock and, healthy demographics). But, the recent scaling back in financial sector bonuses, unfavourable taxation on high-value properties measures and early signs of investor appetite for UK assets easing (after ECB measures calmed markets) suggest that perhaps the recent pace of house price rises will slow in London.