UK: House Hunting

UK: House Hunting

David Tinsley

One of the interesting and potentially useful developments in the UK recently has been some signs that the housing market might be firming up. The latest indicators in this regard will bear watching carefully over the first few months of this year.

The UK housing market has been depressed in terms of transactions for about five years. Before the financial crisis, UK housing market transactions were running at a peak of around 160,000 per month. Then they fell very sharply over the course of 2008, reaching a low of 40,000. But even at the end of 2012, transactions were only running at around 80,000. The same pattern can be seen in mortgage approvals, which were running around 120,000 at their pre-crisis peak. They then slumped to a low of 33,000 in 2008. Currently, they are off their lows, but at 54,000, they are still significantly below previous levels.

Of course, it is probably not expected – or encouraged – to return to the housing market as it was in the pre-crisis period. But, even the long-run average of mortgage approvals, at 85,000, suggests that the market is not close to firing on all cylinders.

Clearly, the contraction in the availability of credit was a significant feature of the housing market slump. Over the crisis, the Bank of England’s Credit Conditions survey recorded sharp falls in the availability of credit that lenders were planning to make available for mortgages, reflecting the generalised deleveraging in the banking sector and the exit of foreign lenders. Net lending secured on dwellings has fallen to levels close to zero.

We are very much in the ‘straws in the wind’ territory at the moment, but there are some encouraging signs that we may move out of this range-bound performance, albeit gradually, this year. Two factors stand out. 1) There has been a large increase in lenders telling the Bank of England’s Credit Conditions Survey that they are planning to boost mortgage availability. 2) There are signs that mortgage rates offered to customers have been falling. For example, the average two-year fixed-rate deal on a mortgage with a 75% LTV has declined to 3.35% currently from 3.7% in mid-2012. Offering some hope that this fall in rates is stimulating demand for housing, the Royal Institution for Chartered Surveyors (RICS) survey has shown a rise in new buyer enquires for the last three consecutive months.

The Bank of England’s Funding for Lending Scheme (FLS), which is providing banks cheap funding if they do not contract their net lending positions, is probably helping both the availability of credit and its retail pricing, and this is to be welcomed. Moreover, the FLS is a fairly large scheme, and, as such, if a recovery gets going then the situation should not run up against constraints that would limit the improvement.

A recovery in the housing market could be beneficial to the economy for a number of reasons. First, of course, there are the usual confidence effects from a firmer market. It is not quite clear, however, how powerful this effect would be in the current conjuncture. Normally, this effect would be thought of as related to a firming in housing prices – a wealth effect – and it is not entirely clear that prices will necessarily rise much just because there is a rebound in transactions. The real value of UK housing has been drifting lower for some time, but not at a rate where housing looks ‘cheap’ by historical comparisons.

Still, a higher churn of transactions could still be useful for consumer confidence. It helps if you believe you can actually sell your house if you need to, and in a reasonable time frame. A dysfunctional housing market can limit labour mobility, which may hold up necessary rebalancing.

Along this effect, there is the more direct effect that a rise in transactions is likely to be accompanied by more spending on household goods. Household goods and services account for 5% of UK consumer spending. Currently, the level of spending in this category is down 22% on its pre-recession peak. Therefore, there is considerable scope for a round in spending here that could make a difference to top-line consumer spending and GDP. Simply put, a 10% rebound in household goods spending would add 0.5% to overall consumer spending – not exactly a game changer, but useful.

Not all of these impacts are likely to be felt evenly across the UK. In particular, it is likely that London and the South East would benefit by more. Looking at prices, for example, shows that in London they are rising by 3.4% on year earlier, according to the official data, while in Scotland they are falling by 2.2%. Moreover, the demographic pressure is highest in London and the South. London’s population, for example, is expected to rise by 14.2% by mid-2021; in the North, that figure is closer to 5%. But, it is not news that the South of the UK tends to lead the cycle.

Of course, much can still go wrong, and we would not put our house on a housing market recovery just yet. But so far, the results are encouraging, and in the context of a calmer global picture, could be supportive of better times.