House price growth is now gradually gaining some momentum. In contrast to our earlier view of a flat housing market in 2013, we now expect some improvement in activity and muted rise in house prices in the year as the government’s Funding for Lending and Help to Buy schemes begin to have an impact on the market.
The latest seasonally adjusted Nationwide quarterly house price index (released on 28th June 2013) shows that UK house prices rose by 0.3% in June, marking the ninth consecutive month of no decline. On an annual basis, house prices were 1.9% higher in June compared to a year ago, suggesting that the UK housing market may finally be recovering from the crippling weakness that held it back in the last few years.
Recent RICS surveys suggest that these prices increases are largely demand-led. New buyer enquiries have risen to their strongest level since August 2009 and price expectations have also improved, with a majority of respondents anticipating a modest rise in prices in the next 12 months rather than the stagnation expected previously. At the same time, while new instructions are positive, these have risen at a slower pace than new enquiries and have, in fact, fallen back slightly in the most recent survey. This has put upward pressure on the sales-to-stock ratio which is typically linked with a rise in house prices.
These trends suggest that the combination of record low interest rates and some forward guidance that these will stay low until the recovery is more assured, plus policy intervention to ease credit and bolster demand amongst financially-stressed buyers (such as the Funding for Lending initiative, FirstBuy, NewBuy and, more recently, Help to Buy) may be bearing fruit. Knight Frank’s Housebuilding Report shows that about 4,000 reservations were made as a direct result of the Help to Buy scheme in the first two months of its launch. Sentiment in the housing market has picked up and indications are that it will translate into stronger house price growth in the months ahead. The fact that low interest rates are more or less ‘guaranteed’ for some time yet only builds short-term confidence in buyers’ finances and buoys their demand further.
Bank of England statistics show that the Funding for Lending Scheme may be having a positive impact on mortgage lending. Although designed to boost overall lending in the economy, particularly to small businesses, the scheme’s largest beneficiaries so far seem to be those house buyers who are able to put forward the required deposit for house purchase. Indeed, 58,242 mortgages were approved in May. While significantly below the 100,000-mark seen pre-2007, it is a clear improvement over the number (of 52,306) seen just three months ago. We expect this gradual easing in credit conditions to persist assuming that jitters around the eurozone economy and the US quantitative easing programme will stay contained.
The economic environment is, at the same time, also beginning to show some signs of revival despite the underlying fragility. The creation of jobs and any positive influences on incomes will add to buyer resilience and contribute to an upward tick in house prices. We expect an annualised rise of 3% in UK house prices at the end of 2013 rather than the more muted growth rate of 0.3% we had previously expected. This difference is largely due to the unexpectedly strong growth of 2.6% in 2013q2. We expect house prices to revert back to more muted rates of quarterly growth thereafter.
Further out we expect the housing market to reach a sustainable equilibrium by posting modest house price rises in the next few years, which, when adjusted for inflation, will bring real prices back in line with more sustainable longer-term house price to earnings ratios.