- Softer news on the housing market as the Land Registry/ONS reported that the year-on-year increase in UK house prices moderated to a more than seven-year low of 0.7% in October. The annual increase in UK house prices has been limited by falling year-on-year prices in London and these were down at an increased rate of 1.6% in October, the largest annual drop since June.
- The softer October house price data from the Land Registry/ONS contrasts with both the Halifax and the Nationwide reporting a pick-up in November. This highlights the fact that house prices can be volatile from month to month and can vary across surveys, so not too much should be read into any one survey.
- Housing market activity has recently faltered amid an unappetising cocktail of Brexit, economic and domestic political uncertainties. While consumers have benefitted from markedly improved earnings growth and rising employment over much of 2019, earnings growth has eased back from July highs while employment has flat-lined since reaching a record high in the three months to June. Consequently, latest Bank of England data show that mortgage approvals for house purchases dipped to a seven-month low in October.
- On the positive side, some support to house prices is coming from low mortgage interest rates and a shortage of properties on the market.
- With the General Election delivering a decisive Conservative win result and the UK now inevitably leaving the EU with Boris Johnson’s deal on 31 January, we believe some easing of uncertainties could help house prices rise by around 2% in 2020. Housing market activity – and possibly to a lesser extent prices – could be given a modest lift in 2020 if the government introduces specific measures aimed at boosting the sector in the Budget (although the Conservative’s plans to cut Stamp Duty appear to have been shelved). Low mortgage interest rates and a shortage of properties for sale should provide some support to prices.
- However, the economy still looks set for a challenging 2020 and there will still be appreciable uncertainties, including on the Brexit front – so that the upside for house prices in 2020 is likely to be limited. It is also notable that the fundamentals for consumers have probably peaked at least for the time being, with earnings growth recently slowing from its July 11-year high and employment essentially flat since midyear.
Howard Archer, chief economic advisor to the EY ITEM Club, comments:
“The Land Registry/ONS reported house prices dipped an unadjusted 0.7% month-on-month in October, having edged up 0.1% in September and risen 0.5% in August. Prices had dipped a much smaller 0.2% month-on-month in October 2018.
“Consequently, the year-on-year increase in house prices fell back to just 0.7% in October, which was the lowest rate since September 2012. It had previously edged back up to 1.3% in September from 1.1% in September and August, and 0.9% in both July and June, which had been the previous low. It is down from 2.0% at end-2018, 4.5% at end-2017 and a peak of 5.1% in October 2017.
“The annual increase in UK house prices has been limited by falling year-on-year prices in London. Indeed, London prices fell again year-on-year in October and at the fastest rate since June after they had risen in September for the first time in 15 months. Specifically, London prices fell 1.6% year-on-year in October as they fell 1.7% month-on-month. They had previously risen 0.8% year-on-year in September after a drop of 0.8% in August and a peak annual decline of 3.2% in May.
“The ONS’ measure of house price inflation lags many of the other measures as it is based on mortgage completions.
“Data are also out for house prices in November, which somewhat surprisingly pointed to a firming in house prices. In particular, the Halifax reported house prices spiked 1.0% month-on-month in November. This was the strongest monthly rise since February (1.5%) and followed dips of 0.1% in October and 0.4% in September. Consequently, the annual rise in house prices on the Halifax measure jumped to a 7-month high of 2.1% in November. It had previously slowed to just 0.9% in October (the lowest since April 2013) from 1.1% in September and a four-month high of 1.8% in August. Meanwhile, the Nationwide reported house prices rose 0.5% month-on-month in November, which was the largest monthly rise since July 2018 and followed an increase of 0.2% in October. There had previously been a drop of 0.1% in September and a flat performance in August. The annual rise in house prices climbed to a seven-month high of 0.8% in November from 0.4% in October and an eight-month low of just 0.2% in September.
Housing market activity currently soft – mortgage approvals dipped to seven-month low in October
“Latest Bank of England data show mortgage approvals for house purchases dipped to a seven-month low of 64,602 in October from 65,803 in September. Mortgage approvals have eased back overall after hitting a 17-month high of 67,060 in July. Mortgage approvals had previously climbed to July’s high from 66,344 in June, 65,558 in May and a 15-month low of 62.622 in March. At 64,602 in October, mortgage approvals were below the middle of the 63,000-68,000 range that has broadly held since late-2016.
“The fact that mortgage approvals fell back in October to be at a seven-month low suggests that housing market activity has recently been under increased pressure from a cocktail of major uncertainties (economic, domestic political and Brexit). It is also notable that employment has essentially flat-lined overall since midyear while earnings growth has slowed from its July high. Indeed, the peak in mortgage activity in July coincided when the fundamentals for consumers were particularly favourable in terms of employment reaching a record high in the three months to June and earnings growth hitting an 11-year high of 3.9% in the three months to July.
“Survey evidence supports the view that housing market activity has recently been constrained by uncertainties. In particular, the RICS housing market survey reported that the results of its November survey “continue to display a cautious approach from both buyers and sellers. Key metrics capturing buyer demand, new instructions and sales remain in negative territory. Much of the anecdotal commentary suggests that uncertainty surrounding the General Election and Brexit are continuing to stifle activity.” Specifically, the survey showed new buyer enquiries fell for a third successive month in November after being flat in August and rising modestly in June and July. Meanwhile, newly agreed sales also fell for a third successive month, albeit at a reduced rate.
Outlook for house prices
“House prices can be volatile on a month-to-month basis and it is important not to read too much into any one survey.
“The housing market may get a modest leg-up from the General Election delivering a decisive Conservative win and the UK now inevitably leaving the EU with Boris Johnson’s "deal" on 31 January. We believe an easing of uncertainties could see house prices rise by around 2% in 2020. Housing market activity – and possibly to a lesser extent prices – could be given a modest lift in 2020 if the government introduces specific measures aimed at boosting the sector in the budget (although the Conservative’s plans to cut Stamp Duty appear to have been shelved).
“Furthermore, mortgage interest rates are at historically low levels. Indeed, there is clearly a very real possibility that the Bank of England’s could cut interest rates in 2020.
“Meanwhile, a shortage of houses on the market will also likely offer some support to prices. The latest RICS survey showed new instructions to sell fell for a fifth successive month, and pretty sharply, in November; properties coming on to the market had previously broadly stabilised over June-August following 11 months of declines through to May. Consequently, average stock levels on estate agents’ books in November were close to the lowest level in the survey’s history. Meanwhile, even if ultimately successful, the government’s recent – and ongoing – initiatives to boost house building will take time to have a significant effect so are unlikely to markedly influence house prices in the near term at least.
“However, the economy still looks set for a challenging 2020 even if there is a Brexit deal so that the upside for house prices is likely to be limited. Furthermore, Brexit concerns could very well pick up again as 2020 progresses due to concerns over what will happen at the end of the year if the UK and EU have failed to reach agreement on their longer-term relationship and the transition arrangement is due to end. Both sides have to agree to an extension of the transition arrangement and Boris Johnson is planning to enshrine in parliamentary law that the UK will not seek an extension.
“While a positive for the housing market is that consumers’ purchasing power has picked up appreciably since mid-2018 and employment recently reached a record high in mid-2019, these healthier fundamentals likely peaked around mid-2019. Specifically, real earnings growth improved from 0.1% in the three months to June 2018 to 2.0% in the three months to July 2019 – but it has since eased back to 1.5% in the three months to October. We suspect earnings growth is likely to stabilise at or just below recent lower levels.
“Meanwhile, employment has essentially flat-lined since mid-2019 and the labour market may well be subdued in the near term at least as companies face a soft domestic economy and still significant uncertainties. Employment reached a record high in the three months to June (although it has since essentially flat-lined).”