Mid-year property update

These days it seems the housing market is rarely out of the headlines. Price growth across the UK has lurched from sclerotic
to ‘out of control’ in less than a year, or at least that’s what much of the popular press might
have us believe.

Sensationalist reporting, generally with a London bias, is unhelpful to calming the boom/ bust sentiment that consumes British housing markets. Alongside this is the blame game, from ‘foreigners’, to Chancellor George Osborne, to Bank of England Governor Mark Carney; we are told at various times that one and all bear a level of responsibility for this affordability ‘crisis’.

Responses have naturally been politicised,
with stimulus programmes to boost demand that are now running in parallel with tools to calm overheating. Market forces are being distorted
by this tug of war, making it more difficult to understand the genuine embedded strength
of market demand.

Macroprudential intervention

There must be a mild sense of bemusement from Governor Carney at the desire to put the Bank of England at the heart of the housing market conversation. No doubt the governor was well aware of the pseudo-celebrity status that the British public and media attaches to the role.

That said, one of the big shifts in UK housing market management has been the transfers of powers – and therefore responsibility – from the chancellor to the governor of the Bank of England. These new macroprudential powers include the ability to place limits on borrowing multiples and tighter controls on the extent of riskier lending that can take place in the market. And, on 25 of June, that’s exactly what the
market received from the Financial Policy Committee (FPC).

Tighter lending practices, extending controls already brought in through the Mortgage Market Review (MMR), will prevent some of the excesses of the last market cycle from being repeated. By limiting the extent of leverage that households can take on, and stress testing their ability to cover housing costs with up to 3 per cent increase in base rates, the FPC is trying to ensure that households are not forced to cut back on wider economic activity in order to meet mortgage costs. This would have implications on consumer spending elsewhere in the economy. What remains to be seen is how this will impact on activity and, ultimately, prices.

The focus of market commentary tends to be on London’s extraordinary post-downturn price bounce. However, in terms of what really matters to the UK, it is the 86 per cent of homes transacted outside of the capital that tell the true story. And, in short, the house price ‘bubble’ is simply not a reality for most of the UK. For example, annualised price growth rates of 2.2 per cent in the North West, 5.4 per cent in the South West and 6.4 per cent in the East Midlands to June 2014 hardly reflect race-away markets.

They are only modestly above average and are typical of a recovery cycle where demand is moving ahead of the supply response in both the new-build and second-hand markets. To use the UK headline growth figure of closer to 8 per cent is just misleading information.

It is in this context that any moves – or lack of – by the Bank of England need to be considered. With the majority of households in the UK only seeing a modest improvement in the value of their homes over the past year, after five years of weak or falling prices, efforts to cool the national housing market recovery seem heavy handed and premature.

Transactions have begun to tick up across all regions of the UK; more slowly than preferred or expected, but nonetheless heading in the right direction. Equally, lending volumes have also continued to improve, showing signs of growing confidence.

Lending multiples, or the price to income ratio, have been creeping up, but remain well within comfortable territory.

Against this backdrop, macroprudential tools for the UK housing market should be viewed as preventative measures for the future, rather than a response to any excesses today.

Forward thinking

The housing market is driven as much by sentiment as rational investment behaviour. Demand is underpinned by emotive elements alongside sound judgements on employment and wage expectations. British purchasers, now somewhat attuned to cyclical periods of price boom and bust, are also conscious of not missing out on periods of sustained price growth.

This ‘me too’ mentality undoubtedly has been a key feature of London demand over the past year and is a big part of the self-fulfilling prophecy of price growth. However, this is not to say it is irrational, nor is it irreversible.

There is no question that some of London’s very strong demand – and price growth – in the first half of 2014 was due in part to a fear of missing out. However, the sanity of open-house viewings with
40 to 60 prospective purchasers through the door became evidence of a demand over-run and somewhat calmer activity has begun to take shape.

At the same time, supply in London for both new-build and second-hand property has continued to improve, providing important choice for home seekers. Together, these two factors are helping the London housing market find a new equilibrium that remains robust, but perhaps a little less frothy than it has been in the recent past.

Our expectations for price growth have been updated accordingly, reflecting a very strong first half of 2014 but a more modest rate of growth towards the end of the year, particularly in central areas. These locations are more heavily impacted by targeted taxation proposals that will affect high-value properties. Resolution to this issue will not come until after the general election in 2015, or at least until we have a clearer sense of which party is likely to form the next government.

Regionally, the UK housing market is also going to be impacted by electioneering over the next 12 months. However, the effect will be different, with regional economic boosts and investment announcements taking a bigger role. On the flip side, any attempts through the mortgage market or other macroprudential tools to calm southern housing markets will come at the cost of arresting nascent improvements elsewhere. Not only do we have a two-speed housing market, it is also at two very different stages of recovery. SJ

Adam Challis is the head ?of residential research at ?Jones Lang LaSalle