Bill Jamieson: Housing tide could turn on itself

Housing appears to be stirring from the doldrums but ultra-low interests rates afford only 'a brittle stability'. Picture: Getty

Housing appears to be stirring from the doldrums but ultra-low interests rates afford only 'a brittle stability'. Picture: Getty

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THIS weekend, and for the next few weeks, the traditional spring house-buying season will finally get under way, delayed, as much activity has been, by the persistent cold and discouraging weather. Might we be seeing at last a turn in the UK housing market?

In recent months, there have been increasing signals that the market may at last be establishing a base, allowing prices to recover. And a growing sense that house prices are stabilising will form a powerful base on which confidence can be built and sustained.

So what are the latest pointers telling us? And what can the best tell us about the likely performance of prices over the medium term?

There is plenty of evidence to suggest a market turn is getting under way. But looking to medium-term prospects, there are also major barriers to a significant and sustained house-price momentum in real terms.

First, the positive news. Figures last week from the Council of Mortgage Lenders (CML) showed that gross mortgage lending totalled £11.6 billion in March, up 9.3 per cent on February. Looking at mortgage lending data for the first quarter as a whole, the figures show a marginal gain on 2012, allowing the CML to comment that, “conditions in the housing and mortgage markets continue to show signs of improving. The improvement in funding markets over the past year, reinforced by the incremental benefits of the Funding for Lending Scheme, has been the key catalyst behind stronger housing activity”.

Other evidence supports the recovery trend. A survey by the Royal Institution of Chartered Surveyors pointed to increased house sales per surveyor, rising newly agreed sales and a pick-up in buyer interest. And the latest Bank of England credit-conditions’ survey indicated a third successive increase in credit made available for mortgage lending in the first quarter, with a further increase anticipated during the second.

A number of lenders have also recently cut some of their fixed mortgage rates. The rate on a two-year, fixed-rate mortgage with a 75 per cent loan to value (LTV) has fallen to a record low of 2.83 per cent in March from 3.06 per cent in January, and 3.69 per cent last August, when the Funding for Lending Scheme was launched. Interest rates on five-year mortgages have also fallen to a series’ low.

All this has caused Global Insight economist Howard Archer, long the grim reaper of housing market optimism, to modify his baleful warnings of further house price declines. Prices, he now says, “may very well eke out a small gain over 2013 supported by modestly firmer market activity, but it seems unlikely that they will make a decisive move upward given the still difficult and uncertain economic environment”.

It may not be until next year when government initiatives – such as the “Help to Buy” scheme to boost mortgage lending and housing activity – take effect.

There has been much talk that this will fuel a new house-price bubble. But this seems unlikely given the subdued outlook for the economy, with the IMF last week down­grading its GDP growth forecast for the UK to just 0.4 per cent this year and from 1.4 per cent to 1.1 per cent next – less than half our long-term trend rate, which we will have now failed to meet for six years.

Add to this the overhang of properties on the market in many areas, the deterrent effect of Stamp Duty levels and the ancillary costs of house-moving – refurbishment and renovation in particular – and a price surge looks most unlikely.

What of prospects in the medium term? Judging by the damning figures from Homes for Scotland showing 160,000 people on waiting lists, while output has fallen to its lowest level in nearly 70 years, it is hard to avoid the conclusion that we are storing up immense trouble for the future with a marked scarcity in new housing. Indeed, the ONS calculates that the rate of house-building will have to double from current levels just to keep pace with the number of newly formed households.

Nevertheless, economist Jamie Dannhauser at Lombard Street Research argues that, while a lack of new homes should provide some support for house prices in the long-term, the chances of a housing market revival are slim. “If house prices keep pace with CPI inflation over the next few years, that will be a good outcome.”

His reading of the market is that, since their big fall in 2007-8 and subsequent rally in 2009-10, house prices have been remarkably stable – at least in nominal terms. But when comparing the current market correction with previous boom-bust cycles using inflation-adjusted data, it is a different story. On this basis, prices have fallen a further 5 per cent since the end of the 2009-10 recovery. From their 2007 peak, they are down by 27 per cent. This compares with peak-to-trough declines in the early 1990s of 38 per cent and 30 per cent respectively. Short bursts of improved buyer activity over the past two years, he warns, “have consistently failed to translate into higher effective demand for housing”.

The biggest problem remains the lack of finance, particularly for first-time buyers (FTBs). Although these account for only 20-25 per cent of residential property sales each year, low activity in this market segment can have major consequences for prices and sales overall. New entrants drive the market. This explains why historically low mortgage rates for the majority of home-owners – borrowers with sufficiently large equity buffers and those without mortgages – have so far failed to stimulate a revival in the market.

And he notes the huge fall in more risky lending to the FTBs. Less than 5 per cent of mortgages to FTBs are now offered with LTV ratios above 90 per cent, compared with more than 40 per cent before the financial crisis.

Quite right, too, will be the conclusion of many. But the effect at this end of the market is dramatic. Back in the world before the financial crash, FTBs would have to find a cash sum of between 30 and 50 per cent of their income for a deposit. Today they have to find a cash sum in excess of their annual income. Meanwhile, many of those already in the market aspiring to move up cannot do so because they are in negative equity with the value of their existing property lower than the outstanding mortgage. And over­shadowing all this is a grim suspicion that the “solution” of ultra-low interest rates may be compounding the problem of a market that has still to make a more realistic price adjustment. The Bank of England may be the darling of the market in the immediate term. But the effect may be to delay a further real-terms fall that many believe to be inevitable. A brittle stability is perhaps the best we can expect. But that is a markedly more benign prospect than the one that seemed to be in store a year or so ago.

Twitter: @Bill_Jamieson

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