LONDON (Reuters) - Britain's housing market showed some improvement in May but further interest rates increases by the Bank of England are expected to put more pressure on demand and on prices in the coming months, an industry survey showed on Thursday last week.
The Royal Institution of Chartered Surveyors' (RICS) measure of new buyer enquiries rose to a net balance of -18, the least negative figure since -14 in May 2022 and up from -34 in April. A gauge of agreed sales rose to -7 in May, up from April's -18.
RICS' house price balance, which measures the difference between the percentage of surveyors seeing rises and falls in house prices, increased to -30 last month from -39 in April. A Reuters poll of analysts had pointed to a reading of -38. However, analysts are forecasting another slowdown for the housing market with markets largely expecting the BoE's Bank Rate to peak at 5.5% later this year, up from 4.5% now.
"It seems storm clouds are gathered, with the UK's stubbornly high inflation likely undermining the recent improvement in activity," Tarrant Parsons, senior economist at RICS, said.
Britain's housing market staged a recovery earlier this year after former prime minister Liz Truss's "mini-budget" caused turmoil in financial markets in September and sent the cost of fixed mortgage rates sharply higher to above 6%. But there have been signs of a fresh loss of momentum in the market recently.
Britain's biggest mortgage lender, Halifax, on Wednesday said house prices dropped by 1.0% year-on-year in May, the first annual decline since 2012. Rival Nationwide last week reported a 3.4% annual fall in prices, the largest since 2009. The BoE, which has raised borrowing costs 12 times in a row since late 2021, is expected to increase Bank Rate again to 4.75% on June 22 in an effort to bring inflation - which was a higher-than-expected 8.7% in April - back to its 2% target.
Some mortgage lenders, including Halifax and Nationwide Building Society have ramped up their fixed mortgage rates in response to the rise in borrowing costs in financial markets.
Halifax UK house prices: what do housing market figures for May 2023 show?
Annual house prices have fallen for the first time in more than a decade, new figures show.
Halifax’s latest house price index data for May 2023 shows the average house price has fallen by 1% across the UK. It is the first time these housing market figures have experienced an annual decline since December 2012 when a 0.1% fall was recorded. The average UK house price slipped slightly from £286,662 in April 2023 to £286,532. It follows continued ‘volatility’ in the economy and the latest sign of uncertainty in the housing market in the wake of Liz Truss’s mini budget. The wider cost of living crisis also appears to be weighing on homebuyers’ ability to afford a deposit and current mortgage rates.
Near-record inflation and high interest rates have reduced the spending power of everyone, although separate Halifax research has shown that some UK seaside towns have apparently remained immune to any downturn. Generally, the cost of a typical home remains close to the record highs recorded in 2022.
Halifax’s data comes after fellow mortgage lender Nationwide recorded the biggest downturn in prices since 2009 in its own HPI. Other analyses by Zoopla and Rightmove have shown sellers appear to be accepting greater discounts on their initial asking prices in a bid to attract buyers. Meanwhile, official statistics show any downturn in prices has been much less pronounced at the completion stage of purchasing a property.
So, what does Halifax’s latest HPI for May 2023 show us - and what does the bank think will happen to the property ladder this year?
The Halifax HPI is a property price index that has been analysing UK house prices on a monthly basis since January 1983. It measures the market by looking at mortgage offers. The bank is responsible for 15% to 20% of the UK mortgage market. It means the Halifax HPI is a good measure of house prices as they appear later on in the buying process - although it doesn’t necessarily mean the deals tracked have gone on to be completed.
Some indices - like Rightmove’s - look at asking price data, which tends to reflect seller sentiments as they currently are but does not show how far above or below the asking price the properties are actually sold for. Others analyse land registry data, which reveals the actual price the property sold for and accurately tracks how much activity there has been in the property market, but tends to be less up-to-date.
What does May 2023 Halifax House Price Index show?
Halifax’s May 2023 HPI shows house prices remained consistent with April's figures, with the average house price now recorded at £286,532 compared to £286,662 in April.
While the average home is coming in at almost exactly £7,000 (2.4%) below the all-time peak of £293,992 recorded in August 2022, it is well above a low of £281,713 recorded in December. Liz Truss’s mini budget was largely responsible for monthly falls of 2.4% and 1.3% in November and December.
To put the latest figure into a longer-term context, average prices are around £10,000 above where they were at the start of 2022. It means recent declines have not come close to wiping out the gains the housing market made during Covid-19. According to Kim Kinnaird, director of Halifax Mortgages, the annual decline "largely reflects a comparison with strong house prices this time last year, as the market continued to be buoyant heading into the summer. Property prices have now fallen by about £3,000 over the last 12 months and are down around £7,500 from the peak in August.But prices are still £5,000 up since the end of last year, and £25,000 above the level of two years ago.
As expected, the brief upturn we saw in the housing market in the first quarter of this year has faded, with the impact of higher interest rates gradually feeding through to household budgets, and in particular those with fixed-rate mortgage deals coming to an end. With consumer price inflation remaining stubbornly high, markets are pricing in several more rate rises that would take (the Bank of England) base rate above 5% for the first time since the start of 2008. Those expectations have led fixed mortgage rates to start rising again across the market. This will inevitably impact confidence in the housing market as both buyers and sellers adjust their expectations, and latest industry figures for both mortgage approvals and completed transactions show demand is cooling. Therefore further downward pressure on house prices is still expected.”
Her comments come after HMRC data showed the number of UK property sales increased 1.3% month-on-month to 89,560 in March 2023. On a quarterly basis, sales are 10.2% down on the volumes being seen between October and December last year and 18.9% below the level of activity being seen in the first quarter of 2022.
What’s happening to house prices in the UK nations and regions?
House prices across the UK have been edging lower compared to last year over recent months. In part, this is because of 2022’s record prices and rapid growth, which the housing market would have struggled to match even without Liz Truss’s Mini Budget. Several UK nations and regions now have lower prices than they did in the three months to May 2022. The South East is leading the descent, with prices now 1.6% down on last year’s comparable figures. Eastern Midlands (-1.0%), Greater London (-1.2%) and the South West (-1.4%) have also recorded declines. Halifax says this reflects the impact of higher mortgage costs, given these areas tend to be the most expensive in the country.
At the other end of the scale, the West Midlands (+2.7%), Yorkshire and Humber (+2.3%) continue to see prices climb. However, their average prices are still well below those of London and the South East. Northern Ireland (+1.6%), Scotland (+1.3%) and Wales (+1.1%) are also continuing to register increases.
House prices will plateau, not crash, says HAMISH MCRAE, but higher rates will stop property rising much further
Where's the floor in house prices and how long will it take to get there? They are tough questions, but anyone needing or choosing to buy or sell their home has to try to work out some sort of answer. Beyond that, since residential property is most people's largest or second largest stock of wealth – the other being their pension or pension rights – what happens is enormously important to the economy. A property crash would crash the economy too.
These questions were given a new urgency last week, with Nationwide Building Society reporting a 0.1% month-on-month fall in prices in May. That reversed a rise of 0.4% in April and resulted in an annual fall of 3.4%, the sharpest fall since the 2008-9 banking crisis.
Nationwide's chief economist, Robert Gardner, thinks that 'headwinds' will strengthen as interest rates are likely to head higher. The markets now think that the peak of rates will be 5.5%, whereas in March they priced in a peak of 4.5%, where they are now. That will push mortgage rates still higher.
But Mr Gardner says, "a relatively soft landing remains the most likely outcome since labour market conditions remain solid and household balance sheets appear in relatively good shape."
Calling it a soft landing suggests some further falls in prices, but nothing like the near 20% peak-to-trough falls between 2007 and 2009, or, for those with longer memories, between 1989 to 1992. I would trust that judgment, partly because the Nationwide is hugely experienced but also because this is common sense.
For people who need to sell suddenly, a soft market is bad news, and higher mortgage costs are of course a dampener. But prices as a whole will be supported by the fact that between one-quarter and one-third of homes are bought for cash.
So we can sketch the most likely outcome for the next couple of years. A few more months of falling prices, but a bottom by the end of this year or early 2024. Then a slow recovery, so that in three or four years' time even those who were unlucky enough to buy at the peak last year will be ahead again.
But what of the longer term? After all, many older people who have paid off their mortgage regard their homes as their pension, an asset they can sell to bump up their income in retirement.
That works if house prices continue to rise in real terms, that is by comparison with the price of everything else. But it is not such an attractive prospect if prices don't keep place with current inflation, as has happened over the past year. In real terms, prices are down more than 10%. Here, it's best to go back to the basics of supply, demand, and affordability. Supply seems likely to remain tight across much of the UK for the foreseeable future.
There are various ways of looking at the issue but the conclusion is the same: we don't build enough homes. The Centre for Cities recently found we are 4.3 million homes short of what is needed, and that the culprit, if that is the right word, is the planning system dating back just after the Second World War. Between 1856 and 1939 growth of housebuilding was 2% a year.
After the Town and Country Planning Act of 1947, it fell to 1.2%. Even if the Government reaches its target of building 300,000 homes a year, it will take 50 years to make up for the backlog. As for demand, it is almost certain that the population will continue to rise, the only issue being the pace at which it happens.
The biggest driver will be migration. It is a contentious issue, but the Office for National Statistics figures a few days ago suggested that net migration in the 12 months to the middle of last year was 606,000, which was 102,000 more than previously thought. Maybe those numbers will decline but there is not much evidence of that at the moment.
So the supply-demand balance seems certain to underpin the market. The drag will be affordability. Rising wages and falling prices helps improve the relationship, but our homes are very expensive by historical standards. Schroders last year suggested the ratio between prices and average incomes – around nine times pay – was the highest since 1876.
Conclusion? The housing market will remain tight for at least another generation. But affordability will stop it rising much further in real terms.