Cover feature: Are house prices heading for a fall?

Momentum is suddenly against the housing market but experts disagree on whether this is a natural adjustment or will lead to a bigger slump in property values

The north-south divide in the housing market is well known but it has undergone a dramatic shift in recent months.

No, London has not suddenly become cheaper than Liverpool, Manchester and Newcastle. However, there has been a major swing, with the brakes being applied to the accelerating growth in property values in the big southern powerhouses. In fact, the capital is experiencing its slowest period of growth in five years.

It is the opposite story, meanwhile, for many cities in the Midlands, the north and Scotland.

These trends are part of the momentous crossroads in the housing market, which many attribute to economic uncertainty. According to one major index, the net effect of the upheaval is the slowest period for UK-wide market growth in eight years. Among those hoping for continued growth there is genuine fear of a collapse.

That said, wannabe first-time buyers will hardly be whooping for joy given that average house prices are still around six times average wages, and Nationwide Building Society expects prices to keep rising in 2017, albeit at a far slower pace.

Richard Donnell, insight director at analyst firm Hometrack, says: “The dynamic of the housing market is shifting. Cities that have been driving price growth over the past two or three years, such as London and Cambridge, are seeing a significant slowdown while large regional cities continue to register robust and sustained growth.

“Buyers outside the south appear to be shrugging off concerns over Brexit and a squeeze on real incomes to take advantage of low mortgage rates.”

Legal & General Mortgage Club director Jeremy Duncombe adds: “While cities such as Birmingham and Manchester are experiencing strong price growth, in London and the South-east we’re starting to see a slight correction in the eye-watering prices we’ve grown accustomed to.”

The most recent Land Registry figures reveal a 1.5 per cent monthly dip in London prices for March – the biggest fall among all English and Welsh regions. Meanwhile, data from the Council of Mortgage Lenders shows that the number of homebuyers in London during the first quarter of 2017 was significantly down. A total of 16,700 loans were advanced in the capital – 5 per cent less than in the previous quarter and 19 per cent down on Q1 2016.

CML director general Paul Smee says: “A trad­itional winter dip is expected but it has been more pronounced in London as persisting supply and affordability issues exert ongoing restraint on growth.”

Nevertheless, Smee expects demand in the capital to pick up during the summer. Data from Hometrack supports the trend of stuttering London growth. The latest UK Cities House Price Index puts the capital among the four slowest-growing UK cities, with annual house price growth of just 3.5 per cent in the 12 months to April – the lowest rate for five years. Only a year ago it recorded a whopping 14.4 per cent rise in London prices.

In contrast, Hometrack’s data shows Manchester topping the growth chart with an 8.4 per cent year-on-year increase, followed by Birmingham and Leicester, both on 7.7 per cent, and then Nottingham on 7.2 per cent. All four members of that quartet experienced a rise in annual growth rates in April.

As the data illustrates, however, the UK picture is far from homogenous. Garrington Property Finders managing director Jonathan Hopper says: “The slowdown is anything but uniform. Properties in some regions are seeing double-digit price reductions; yet, at certain price points in the most in-demand areas, gazumping and intense competition between buyers are the order of the day.”

Net effect

Data sources differ on the net effect of regional changes in house price figures.

Nationwide recorded a monthly fall of 0.2 per cent in May, following April’s 0.4 per cent drop. For the year to 31 May, however, it found that prices had risen overall by 2.1 per cent, although this growth was the weakest in four years.

Feature-Nationwide data
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In addition, May’s data marks the first time since 2009 that Nationwide has reported three consecutive monthly falls.

The Halifax house price index for the three months to 31 May shows prices increasing by 3.3 per cent from the same period a year earlier. Crucially, however, they were 0.2 per cent lower over the quarter – the second consecutive quarterly fall.

Demonstrating the extent of the change, Halifax reported just last December a 2.5 per cent quarterly rise.

Hopper says: “While the property market – and the economy – are a world away from 2009, the 2017 dip is slowly turning into a downturn. The irony is that, just two months ago, activity in many areas was brisk as the clouds of Brexit hesitancy began to part.”

Meanwhile the Land Registry index, which lags behind the other big two, showed an annual price increase of 4.1 per cent for the year to 31 March but a monthly dip of 0.6 per cent.

Likely causes

So why has this happened? Experts have attributed the market’s reversal in fortunes to a number of factors, including the uncertainty caused by Brexit and the snap general election, the strain on household budgets from rising inflation, which stood at 2.6 per cent in April, and the possibility that a correction was inevitable due to the relentless and unsustainable rises over recent years.

Halifax housing economist Martin Ellis says: “Housing demand appears to have been curbed in recent months due to the deterioration in affordability caused by a sustained period of rapid house price growth during 2014/16.

“Signs of a decline in the pace of job creation, and the beginnings of a squeeze on household finances as a result of increasing inflation, may also be constraining the demand for homes.”

Looking deeper into affordability as one of the root causes, research by estate agent eMoov shows that, while UK-wide house prices are just over six times average wages, in London the figure is double that.

According to the Nationwide index, the average UK house price stands at £208,711. In London, however, the average house price at the end of March was a whopping £478,782, the index shows.

The capital, in particular, has always been a different market from the rest of the UK based on its attractiveness to overseas investors. This has helped to inflate prices – although, if locals can no longer afford property in many areas of London, inevitably it will create a strain.

eMoov CEO Russell Quirk says: “A market slowdown may send an air of panic across the UK but the reality is this stuttering pace of price growth is more of a natural adjustment after the high rate of inflation witnessed over the past few years.

“Despite the current unpredictability, homeowners are still seeing a return on their investment on an annual basis and it is far better for the market to adjust slowly than for it to crash as it did a decade ago.”

If inflation is indeed one of the causes of the slowdown, it can be traced back to the Brexit vote given the general acceptance that a key driver of the UK’s rising consumer prices has been the weakening pound – argued by most commentators to have been caused by the EU referendum result – which has pushed up the cost of imports.

In fact, Hometrack predicted in May 2016 that, if the UK were to vote a month later to leave the EU, London property values would be hardest hit.

Financial uncertainty, resulting from both the Brexit vote and the announcement of the snap general election, is also cited as contributing to the wobble in some people’s confidence.

Alex Gosling, chief executive of estate agent HouseSimple, says: “We have to remember this snap election was announced closely on the heels of Article 50 being invoked. That’s an awful lot of uncertainty for the British people to digest.”

Nationwide is less convinced about the impact of the election announcement. Its chief economist, Robert Gardner, says: “If history is any guide, the slowdown is unlikely to be linked to election-related uncertainty. Housing market trends have not traditionally been impacted around the time of general elections.

“Rightly or wrongly, for most homebuyers, elections are not foremost in their mind while buying or selling their home.”

Mitigating factors

Although momentum is against the housing market, many argue that the lack of supply, combined with low mortgage rates, will stall a bigger slump in property values. Certainly anyone looking to buy a home has never been able to borrow as cheaply.

The penny did not so much drop at this real­isation as come crashing down when, in April, challenger bank Atom launched a 1.29 per cent five-year fix with a £900 fee for borrowers with at least a 60 per cent deposit.

Some brokers called the offer “stupidly” cheap, given it was not just the lowest such deal ever but the lowest by some margin. Unsurprisingly, it lasted barely a week. Nevertheless, the current crop of deals is hardly unattractive.

At the time of writing, the top offers for borrowers with a large deposit stood at 1.14 per cent for a two-year fix and 1.74 per cent for five.

The Mortgage Advice Bureau says it witnessed “one of the busiest weeks on record” at the end of April, which it says demonstrates that, “despite the current economic and political climate, for many it’s a case of keeping calm and carrying on”.

Given it can take at least a month to complete on a house purchase, whatever indeed has happened across the market has yet to feed through into any of the major housing indices.

On the supply side, many experts such as housing charity Shelter insist the UK needs 250,000 new homes a year to keep pace with demand. Yet most recent Government statistics show that construction began on just 172,740 homes in the 2015/16 financial year.

“Transaction volumes and prices will continue to be supported by affordable mortgage rates and sustained demand for housing,” says Private Finance director Shaun Church.

“With demand for housing showing no signs of stopping, intensifying competition for homes will drive up prices in the long term unless new properties are made available.”

For this reason, many still worry that prices are too high to foster a healthy housing market, given so many properties are too expensive for both first-time buyers and movers who need a bigger home to support a growing family.

Duncombe warns: “Across the country, homeownership is still out of reach for many. The reason for this is simple: we are not building enough houses to accommodate the high demand the market is continuing to experience.

“Potential borrowers are finding they need that extra helping hand to get on the ladder, often from the Bank of Mum and Dad. However, this isn’t sustainable and can change only if we ramp up pressure and activity on the supply side to pull down house prices.”

All things considered, the UK’s leading housing market commentators expect prices to remain steady or even rise in 2017.

Ellis says: “Continuing very low mortgage rates, together with an ongoing acute shortage of properties for sale, should underpin house prices over the coming months.”

Gardner adds: “The subdued level of building activity and the shortage of properties are likely to provide support for prices. As a result, we continue to believe that a small increase in house prices of around 2 per cent is likely over the course of 2017 as a whole.”

As of last Friday, the economy has received yet another upset with the unexpected result of a hung parliament following the general election.

It remains to be seen how this will affect the housing market but several commenters predict that transaction volumes will fall yet again awaiting more stability.

Feature-Hometrack data
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