Where next for UK house prices?

Today has brought a flurry of information on the state of play in the UK housing market as we wait to see how the slow sown in house price growth is developing. We start by noting that according to the official series things may have changed a little.

Average house prices in the UK increased by 1.3% in the year to August 2019, up from 0.8% in July 2019 (Figure 1) but remain below the increases seen this time last year. Over the past three years, there has been a general slowdown in UK house price growth, driven mainly by a slowdown in the south and east of England.

As someone who welcomes the fact that UK wage growth is now well above house price growth it is a shame that house price growth picked up. But we do at least have wages growth around 2% higher than house prices. That will take quite some time to fix the imbalances bit at least they are not still growing.Indeed the place where things are worst on the affordability front is improving faster than that.

he lowest annual growth was in London, where prices fell by 1.4% over the year to August 2019, followed by the South East where prices fell by 0.6% over the year.

This weekend has seen a swing in both directions from the Financial Times. First there is a switch to Paris.

Why London’s bankers cannot resist Paris property

Then er perhaps not.

David Livingstone, the new head of Citigroup in Europe, said the City of London will remain the region’s top financial centre regardless of the outcome of Brexit.

For balance here is the other side of the coin.

House price growth in Wales increased by 4.5% in the year to August 2019, up from 3.8% in July 2019, with the average house price at £168,000.

Rightmove

They have joined the fray this morning via Reuters.

Asking prices for British houses put on sale in October showed the smallest seasonal increase since the financial crisis, as all but the most determined sellers waited for greater certainty over Brexit, industry figures showed on Monday.

Rightmove said that the average asking price for homes sold via its website was 0.6% higher in October than in September, well below the average 1.6% rise seen for the time of year and the smallest increase since October 2008.

Reuters seemed a little less keen on this bit.

Average asking prices in October were 0.2% lower than in October 2018, compared with an annual rise of 0.2% in September.

Views differ on the 2016 referendum but personally I welcome this consequence.

Britain’s housing market has slowed since June 2016’s referendum on leaving the European Union, and official data last week – based on completed sales – showed annual house price growth of 1.3% in the year to August, up from a near seven-year low of 0.8% in July.

LSL Acadata

LSL operate rather a different system to the asking price driven Rightmove and in fact Rightmove’s methodology seems to have taken a further downgrade according to Henry Pryor.

“..average asking price for UK homes sold..” I think it’s for homes listed, it includes the 50% of homes that don’t sell.

LSL however use this.

The LSL/Acadata house price index provides the “average of all prices paid for houses”, including those made
with cash.

As to the detail there is this.

Although average house prices in England and Wales climbed by a marginal £113 in the month of September, this was not a sufficiently large increase to avert a further decline in prices over the last twelve months, with the average annual price over this period falling by some -£1,100, or -0.4%. This was the eighth month in this calendar year in which the annual rate of growth has been negative.

In terms of a trend their accompanying chart shows that UK house price growth was of the order of 9% as 2016 began and has been heading lower ever since. So it was heading lower before the Brexit vote partly because if I recall correctly some tax changes for landlords which inflated things then deflated them.

As to the situation regarding real movements I am afraid that LSL then dig a hole for themselves. You can ( and I often do..) argue that the imputed rent driven CPIH is a woeful measure anyway but surely one should use wage growth here.

if we exclude London and the South East from our national statistics, price growth in England & Wales has remained positive over the last twelve months, albeit at a diminishing rate, such that by the end of September the rate of growth was a flat 0.0%……..It is currently only Wales where house price growth is ahead of CPIH. So we have marginal nominal gains alongside real terms falls, although of course the picture varies by type and area.

They have a go are torturing the numbers in a way that makes me wonder if they want a career at the Bank of England but they end up with all areas seeing real wage gains. Even Wales has some real wage growth relative to house prices.

London

As a Londoner I have to confess I am intrigued by the intra-London swings although the explanation below is a worrying one for the methodology used by LSL.

Unsurprisingly, it is East London where the largest rise in average prices in August for both the month itself and the
previous twelve months has been recorded, with Hackney up by 5.1% and 13.4% respectively. The reason for this gain
in prices is the launch of a new-build apartment block, known as the Atlas Building, comprising some 302 flats at 145 City Road, Hackney, close to Old Street Station. 67 of these apartments have been recorded by the Land Registry as having been sold in June and July to date, with prices ranging from £500k to £1.7 million. Given that this project
involves 302 new-build flats, we can anticipate that Hackney will continue to be at the top of the price-growth tables for several more months to come.

I would have hoped to have some quality measure or at least some form of allowing for the fact the new build sales are different to sales of existing houses or flats. Those selling an existing property in Hackney seem set to get a shock if they base their calculations on the LSL series.

Meanwhile on the other side of the coin.

At the other end of the scale, the borough with the largest fall in average values over the last twelve months is the
City of London, at -28.6%, but because few transactions take place there, its price movements are always quite
volatile, especially when expressed in percentage terms.

Also whilst we are looking at methodology we see that the average price overall has just dipped below £300k as opposed to the £235k of the official series.

Comment

It is easy to forget that there is much in the UK economy that is still house price growth friendly. For example mortgage rates remain very low driven by a 0.75% Bank Rate and a 0.53% five-year UK Gilt yield helping to keep fixed-rate mortgages at a low level. It seems the TSB wanted to join the party as of Friday.

TSB has made a series of changes to its mortgage range, featuring cuts of up to 1.30 per cent.

The biggest cuts can be found in the lender’s remortgage 10-year fix suite, with the 85 – 90 per cent LTV rate being chopped from 4.29 per cent to 2.99 per cent. This also asks for no fees and comes with free legals. ( Mortgage Strategy )

To this we can add the positive situation regarding real wages we noted above.

Foreign buyers may have been dipping into the market to take advantage of the lower value of the UK Pound. However things have changed there recently as 141 Yen and 1.28 versus the Swiss Franc replace the levels I noted on the 27th of August.

For example as markets opened yesterday the Yen went to higher levels than the “flash rally” ones I noted on the 3rd of January and at 130 Yen London property looks a fair bit cheaper. You could say the same about 1.20 versus the Swiss Franc.

Help To Buy shared ownership is still in play and has helped one of my friends and conveyancing delays permitting is about to help another.

The problem for house price bulls is that the measures above ( with the exception of real wage growth) were what was required to get UK house prices up to these levels, not to drive them higher. Real wage growth will take another year or two to have a significant impact. So unless we see a new move by the Bank of England or the UK government we seem set for real falls in house prices ( versus wages) and maybe nominal ones too.

Podcast

 

 

 

 

 

 

12 thoughts on “Where next for UK house prices?

  1. Hello Shaun,

    re : “asking price ”

    well that checks the sentiment of the sellers , not the estate agents who all think they can sell so much higher. Why not ? we’ve had a housing boom for about 20/30 years now , 1990′ last time it was collapsing ?

    nobody is prepared to believe housing is going through a correction now, since December 2018 from my experiences. You can get a good price on a sale if you have a modernized designer home but anything needing even just a lick of paint just doesn’t move, here in the SE anyways.

    I can believe houses are increasing outside the London bubble as people have reported here and also friends have sold up and moved out , yes, even to Wales .

    As for the actual selling prices , we are 3 months behind in official figures .

    good news for some , but MC must be fretting !

    Forbin

    Ps : don’t mention the word “panic!!” 😉

    PPs : “as all but the most determined sellers waited for greater certainty” weasel words, means that if you’re having to sell then you takes what you can get, otherwise you’re wondering if that last offer was actually the best …….. uh oh …….

    • Around here ( Cheltenham) there are few properties coming to market but a terrific amount of extension / upgrading going on. I have been involved in talking to estate agents on behalf of my daughter who is looking to buy, and they say Brexit has nothing to do with the slow down and it’s the high stamp duty on high cost houses that is the killer. Some new build four beds around here are on the market for £600K. I don’t think that prices are actually going up but then they were/are at ludicrous levels anyhow. A friend who is in the building / upgrading business is working as hard as he has ever done and workmen in general have very long lead times if you need anything doing.

      You are right about houses needing to be perfect to move into straight away. That is the same thing I am being told here. Doer uppers sell if they are cheap and there are people who want to make a living doing that but by and large it’s the immaculate properties that sell.

    • forbin,

      You are correct houses in the North West are still picking up and where I live they are selling fast. What is happening is where house prices have risen the fastest now stalled or fallen and some parts of the UK now catching up.

      I know for a fact foreign investors buying flats and new builds in the cities such as Liverpool and Manchester where the yield are higher and probably circa 4% or 5%.

      But what will happen next?

      I think this all now depends on two important things, the first interest rates the second the UK economy.

      In respect of the first issue I do think UK interest rates fall further regardless of BREXIT as the world continues to slow and it will affect the UK economy, so up North house may not fall as much as the rest of the UK it may be they stagnate for a while.

      However all this depends on whether or not unemployment rises and last Friday two more retailers announced they were to go into administration, Bon March’e, which has gone into administration before and bought out by Philip Day earlier this year and now again in administration,which puts 3,000 jobs at risk:
      https://www.theguardian.com/business/2019/oct/18/fashion-chain-bonmarche-calls-in-administrators

      Watt Bros a Scottish Department store goes bust and 229 staff made redundant immediately:

      https://www.theguardian.com/business/2019/oct/18/scottish-department-store-watt-brothers-closes:

      BBC:
      https://www.bbc.co.uk/news/uk-scotland-glasgow-west-50098477

      Two retailers bust appoints administrators in one day is bad news and the High Street still in a bad place Debenhams is set to close many stores after Christmas

      So to conclude with regards to Shaun’s comments which I have copied below:-
      There may indeed be more falls and I believe there will be but more and higher price falls in the regions which are overpriced however some other areas as I have mentioned may not see any falls and if they do they will probably be minimal unless there is a complete meltdown in the world economy, as there still a demand in the North West and yields are quite good.

      “The problem for house price bulls is that the measures above ( with the exception of real wage growth) were what was required to get UK house prices up to these levels, not to drive them higher. Real wage growth will take another year or two to have a significant impact. So unless we see a new move by the Bank of England or the UK government we seem set for real falls in house prices ( versus wages) and maybe nominal ones too.”

      One has to bear in mind the house price falls in the late 70s or 80’s I cannot remember the precise dates, interest rates were far higher than they are today and that will have a significant bearing on house price increase or falls. We are in a different economic world now in relation to demand of property and longevity in low rates of interest, and also unemployment in the UK.

  2. Hi Shaun, housing posts are always going to get a lot of interest.

    Lets face it for many people, especially the not working semi-retirees then this is their un-earned lifestyle and cash machine. It seems inconclusive about any significant trend, as you say wages are rising the last year or two but house prices have risen since Y2K so any immediate balance between the two is irrelevant in the bigger picture of “compounding”.

    I think the majority of “status quoers” folk who want Britain to stay the same in face of globalisation, are really just folk who strive to ensure that their un-earned wealth is not put at risk. It kind of risks the important future for younger people and even the climate, since we require to continue to titivate knackered -old inefficient properties of 100 years ago…. and pretend their fabric and history is of such great value. You don’t see so many morris minors on the road today, indeed a lot of very high tech German cars and even electric ones, but houses… changes… no no.

    About time we have property taxes calculated according to efficiency and footprint, maybe a rates revaluation for local authorities, one that have been put off for 20 years.

    Then we can really talk about property values.

    🙂

    • Hi Paul C

      It is an interesting point you make about older properties as I live in one built around the 1890s! The plus side is that it is there and only requires maintenance and not a new build with all the resources they require. The downside is the structure with not only the chimneys I have (2) but also some which have been partially closed off. The walls may not be too bad as they feel almost back to the wattle and daub era and certainly eat my wifi signal.

      As to property taxes they are quite a shambles as you say. We will find out a little more tomorrow and I will make a point to look up the Stamp Duty data when the Public Finances numbers are released at 9:30 am.

  3. Great blog and podcast as usual, Shaun.
    Maybe you take too pessimistic a view of the incorporation of housing prices, or at least dwelling prices, in Eurostat’s HICPs. We are now approaching the first anniversary of the EU report nixing the inclusion of the OOHPIs in the HICP. Note however, that the report said: “This view regards the net acquisition OOH as conceptually viable for integration into the HICP, but requires structure and land to be separated for the purpose of prices AND weights. IT WAS THE VIEW TAKEN BY THE ECB when consulted for the preparation of this report.” (Emphasis added.) This is contrasted with the hardcore view, obviously inconsistent with other decisions made regarding the HICP, that the HICP is bound by National Accounting principles on defining the scope of consumption and net new dwelling acquisitions cannot be part of the HICP. So it seems that Super Mario’s objection to the methodology employed in the OOHPIs from 2000 forward was limited to proxying dwelling prices in the new dwelling acquisition component using house prices, and if dwelling prices were used in the measure, as they are, for example, in the Australian CPI, he would have been OK with it, conceptually speaking. So maybe in the year 2038, the EU will issue a report, pro or con, on going forward after new experimental series have been calculated using OOHPIs based on dwelling prices instead of housing prices. The Canadian CPI has a long experience with calculating dwelling prices indices, which are used in the housing depreciation component. The bad news about these series, based on contractors’ guesstimates of the portion of their house prices accounted for by the dwelling prices, is they generally do an indifferent job of keeping land price movements out of the dwelling price series. The good news about these series, if you think that the whole focus on keeping land prices out of a macroeconomic consumer price series is ridiculous, is that they do such an indifferent job of keeping land price movements out of the dwelling price series. There are other ways the separation can be made, but I suspect however Eurostat decided to do it, land price movements would still creep into their so-called dwelling price series.
    So it is too early to give up on the EU eventually incorporating an OOHPI based on the net acquisitions approach into the HICPs. However, it is obviously way past time that the UK jettisoned Gordon Brown’s idea of the Bank of England adopting the HICP as its target inflation indicator for consistency with Europe, and more particularly the European Central Bank. Arguably, in 2003 it wasn’t such a bad decision. As you said, most people, including Mervyn King, thought that inclusion of OOHPI in the HICP was just around the corner, and no-one saw a bank run on Northern Rock coming up on them. Today, after all that has happened, it would be quite insane to persist in that view. The UK should incorporate its own OOHPI based on its own definition of net acquisitions in its own target inflation indicator, which ideally would not conform to HICP principles in every instance. Brexit or no Brexit, the UK has always had the freedom to define its own target inflation indicator, and it has seen that this is not a task that can be safely delegated to Eurostat.

    • Hi Andrew and thank you

      You had me going until this bit.

      “So maybe in the year 2038, the EU will issue a report,”

      🙂

      It is just so similar to the UK experience where the former Governor of the Bank of England Mervyn King was supposed to push for owner-occupied housing in the UK CPI. I recall you posting a speech from him from over 15 years ago. But he left with nothing achieved on this front ( like Mario Draghi ).

      As to this in my home country Canada I think it is a combination of ridiculous and desperate.

      “The good news about these series, if you think that the whole focus on keeping land prices out of a macroeconomic consumer price series is ridiculous, is that they do such an indifferent job of keeping land price movements out of the dwelling price series. ”

      My flat would have been maybe a fair bit cheaper if I had been able to avoid paying for the land but I could not even though being a flat I end up with a share of the owning company. Yet in their fantasies you can.Meanwhile I note I can find a ground rent series for leaseholders for RPI but not CPIH.

  4. The near term outlook all depends on the outcome of the BREXIT fiasco, if Johnson’s deal goes ahead as planned(v.unlikely IMHO), sterling will soar, if not a likely general election will introduce more uncertainty and depress house prices further until the eventual in/out argument is settled which if ever – could take years.

    If you look at the chart of the FTSE Allshare, it topped out at the end of 2017 and made a double top five months later, my story of the car dealers last week encountering the turn in their business profitability about the same time and Forbin’s tales of the property market down south stagnating all seem to indicate markets are waiting for the next reflation signal from central banks, as I said last week, we are literally now at a coin toss situation where the central banks have to either go all in and continue their failed policies of the last ten years and print until there are sparks coming off the presses and we have a hyperinflationary bust(they can’t admit they were wrong can they?), or they give up and accept that ten years of inflating assets hasn’t led to real growth, stop QE and let rates normalise, leading to a deflationary bust that leads to massive bond and stockmarket crashes and property price collapses.

    If in the near term we leave with Johnson’s current deal, Carney is going to be in a very difficult spot, he is going to see a big boost to business confidence, investment and sentiment following the removal of three and a half years of uncertainty, added to that he is going to be facing a massive rebound in sterling, this will be extremely embarrassing for him and all the “remoaners”, as they predicted a financial catastrophe if we ever left. This will make his next move to cut rates and re-start QE even more difficult to justify without looking like he is deliberately trying reflate the housing bubble and destroy the £ – which he is, over to you Mark!!!

    • Hi Kevin

      I agree that Governor Carney is in quite a pickle. He may be one of the people wanting it go on and on or at least until the 31st of January when he is supposed to depart. Otherwise he has some decisions to make because as you say a Brexit deal leading to a higher £ and a rebound in business investment leaves him in a mess.

      The chance of more QE has started to be priced out of the UK Gilt market as the-ten-year yield today was the same as Bank Rate ( 0.75%). Shorter dates are still below Bank Rate but as Brexit uncertainty carries on a November Bank Rate cut seems less likely.

  5. ‘They have a go are torturing the numbers in a way that makes me wonder if they want a career at the Bank of England’

    Ouch!

    Worth noting LCP’s Acadata report has a section specifically focusing on new build premium which last time I read it was 16% or so.Which should be quietly scary if you’ve a HTB mortgage

    It’s always refreshing to read commentary on the UK housing market that questions whether ‘HPI forever’ is either sustainable or sensible.

    The LSL report which I looked at yesterday shows that the supertanker may have started its turn before Brexit.

    I suspect Irving Fisher and Hyman Minsky are moving up the Google search rankings.

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