While individual house indices have offered a confused picture of the state of play in the UK housing market, with dips following rises, the collective data of all of the main indices is starting to show that we are now in positive territory for 2009, says Assetz.
Following Nationwide’s third consecutive monthly house price rise in July, Assetz Chief Executive, Stuart Law cuts through the market volatility in the major UK house price indices, and outlines the potential risks to emerging recovery.
“The latest figures from Nationwide provide the first sign of any sustained monthly price growth from a single index since the start of the downturn in Q3 of 2007. However, the differing figures released by the various UK house prices indices can create some confusion about the overall state of the market.
“The seasonal adjustments recorded by some of the indices are set at the discretion of the organisation producing them, with no formal scientific basis, which leaves room for politics in the decision on how figures are released. The result has been some major jumps in monthly growth, as previously suppressed figures are suddenly released to prevent them building up to a greater level later in the year, as seen with the sudden 2.6% Halifax index change in May.
“Taking an average figure from across the major indices offers a fairer indication of current prices. Data taken from the Assetz House Price Watch, an amalgamation of the five major UK house price indices, shows that in May and June this year house prices turned positive against figures recorded at the start of 2009. While the improvement from January 2009 is so far minimal, there were few pundits at the start of the year who believed we would enter positive territory for house prices at all this year, so the latest figures are encouraging and it is good to see more and more people gradually acknowledging that house price falls could well be over.
“The house price data released so far for July shows rises from both Rightmove and Nationwide, and the signs are good for more positive figures from the other key players. I suspect we will see another big upward price bounce from Halifax in July, as a result of their volatile seasonal adjustments.
Recovery and Risk
“All signs now point to increasing house prices for 2009, perhaps between 5% and 10%. As an investor this presents something of a double-edged sword – while a return to capital growth is positive for long-term investment, the recent low prices have represented major income prospects from the extraordinarily high yields achievable, particularly from distressed property sales.
“The current factors supporting positive house price growth are:
- Current lack of supply – Rightmove report half the number of new listings it had a year ago, constricting availability, particularly of quality property
- Future lack of supply – according to CLG, annual housing starts are down to about 90,000, compared to government targets of 240,000
- Extremely low interest rates – more favourable mortgage products are now gradually becoming available
- Consumer confidence – the feeling that the end of the world was coming has dramatically subsided for most people, and has been replaced by a feeling that the worst is over and things can only improve over time
“The current factors that may still impede recovery and decrease prices:
- Interest rate rises – low risk –the Bank of England is generally not quick off the blocks to make changes, but any attempts to slow down house price growth would result in more expensive debt for companies and consumers, and would almost certainly impede any recovery significantly
- Unemployment – low risk – unemployment figures will doubtless continue to grow but will probably not reach the most pessimistic forecasts. Nonetheless jobless numbers increasing does not have a historic correlation onto house prices and indeed we can already see prices firming up this time around whilst unemployment is still rising
- Increased supply in re-sale market – moderate risk – as house prices pick up there is a chance that sellers will suddenly return to the market in droves. However, a sudden change in the number of willing sellers is unlikely while house prices remain lower than their peak. We expect a gradual increase in numbers of properties coming onto the market rather than an overnight change. We expect this supply to be soaked up by gradually increasing demand, supported by a gradually improving mortgage market
- Increased supply in new-build market – low risk – there is almost no sign of developers starting to build on sites again, with most developments mothballed. The focus is on selling what they have. With development finance well and truly withdrawn from the market for most developers it is very unlikely that construction of new homes will increase dramatically and could in fact take many years to recover to previous peaks.