UK housing market remains under considerable pressure – EY ITEM Club comments on today’s Land Registry / ONS figures

13 February 2019

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  • Land Registry/ONS reported that UK house prices edged up 0.2% month-on-month in December after dipping over the previous three months. The annual rate of increase dipped to 2.5%, the lowest level since July 2013.
  • The annual increase in UK house prices was dragged down by prices in London falling 0.6% year-on-year in December, which was a sixth successive annual decline.
  • The housing market is under significant pressure. The Bank of England reported that mortgage approvals for house purchases slowed to an 8-month low in December while RICS reported that buyer enquiries fell for a fifth successive month.
  • If the UK ultimately manages to leave the EU with a “deal”, we expect UK house prices to eke out a modest gain of 2% over 2019. Reduced uncertainty could help housing market activity pick up along with a gradual improvement in consumers’ real income growth. Meanwhile, high employment and low interest rates should offer further support to activity. A shortage of houses for sale will also likely offer some support to prices.
  • If the UK leaves the EU at the end of March without an approved Brexit “deal”, house prices could fall by around 5% in 2019 amid heightened uncertainty and weakened economic activity.
  • If Brexit is delayed, ongoing uncertainty is likely to weigh down on the housing market and could well see house prices stagnate or even fall slightly. Much would depend on how long any UK exit from the EU is delayed and what happens then.

Howard Archer, chief economic advisor to the EY ITEM Club, comments:

“The Land Registry/ONS reported that house prices edged up 0.2% month-on-month in December. This followed dips of 0.5% in November, 0.1% in October and 0.2% in September. Prices had risen by a larger 0.4% month-on-month in December 2017.

“The year-on-year increase in house prices dipped to 2.5% in December, which was the lowest level since July 2013. It was down from 2.7% in November, 3.0% in October, 4.5% at the end of 2017 and a peak of 5.1% in October 2017.

“The annual increase in UK house prices was dragged down by prices in London falling 0.6% year-on-year in January, as they edged up 0.1% month-on-month. This was a sixth successive year-on-year fall in London prices with the peak annual drop of 1.5% coming in September.

“It needs to be kept in mind that the ONS’s measure of house price inflation lags many other measures as it is based on mortgage completions. Data released for house prices in January from the Nationwide puts prices up just 0.1% year-on-year. The Halifax estimates annual house price inflation at 0.8% in the three months to January.”

Housing market activity slowed in late-2018, seemingly impacted by heightened uncertainties

“The latest data from the Bank of England shows that mortgage approvals for house purchases edged down further in December after a marked drop in November, reaching an 8-month low of 63,793. This was down from 63,952 in November and a 9-month high of 67,029 in October. Mortgage approvals had previously improved to October’s high from a 2018-low of 63,394 in March (which had also been the second lowest level after December 2017 since August 2016).

“December’s level of 63,793 took mortgage approvals for house purchases towards the bottom of the 63,000-68,000 range, which has broadly held for the past two years. It fuels the belief that Brexit and economic uncertainty may now be having an increased dampening impact on housing market activity. Housing market activity is also being impacted by still relatively limited consumer purchasing power (despite some recent improvement), fragile consumer confidence and, very possibly, wariness over higher interest rates. Although there are varying performances across regions with the overall national picture dragged down by the poor performance in London and parts of the South East.

“This is also borne out by latest survey evidence from RICS. Their December survey was reported to show ‘the year ending on a weak note, with key activity indicators continuing to slip at the headline level. Political uncertainty is increasingly being cited as a constraint on the market, alongside the well-established challenges around affordability and a lack of stock available for purchase’. Specifically, new buyer enquiries fell for a fifth successive month and at an appreciable rate. Newly agreed sales were also down for a fifth month running.

“Furthermore, the latest Bank of England credit conditions survey (released in mid-January) revealed that lenders’ expectations of demand for mortgages for house purchases in the coming quarter are the weakest for eight years.”

Outlook for house prices

“If the UK ultimately manages to leave the EU with a “deal” at the end of March, we expect UK house prices to eke out a modest gain of 2% over 2019. Reduced uncertainty could help housing market activity pick up, along with a likely gradual improvement in consumers’ real income growth. Meanwhile, high employment and low interest rates should offer further support to activity. Meanwhile, a shortage of houses on the market will also likely offer some support to prices.

“If the UK leaves the EU at the end of March without an approved Brexit “deal”, house prices could well fall by up to 5% in 2019 amid heightened uncertainty and weakened economic activity.

“If Brexit is delayed, ongoing uncertainty is likely to weigh down on the housing market and could well see house prices stagnate or fall slightly. Much would depend on how long any UK exit from the EU is delayed and what happens then.

“The fundamentals for house buyers currently remain challenging. Consumers have faced an extended squeeze on purchasing power, which is only gradually easing. In addition, housing market activity remains hampered by fragile consumer confidence and a limited willingness to engage in major transactions. Indeed, consumer confidence in January remained at the lowest level since mid-2013, according to the GfK survey. Caution over making major purchases will likely be magnified in the near term by heightened uncertainties over Brexit.

“House buyers will also likely be concerned about further interest rate hikes over the medium term – even if they are likely to be gradual and limited. It’s worth remembering that the share of outstanding mortgages on variable interest rates has fallen to a record low of around 35%, which is half the peak level of 70% in 2001.

“Housing market activity and prices are also likely to be pressurised by stretched house prices to earnings ratios and tight checking of prospective mortgage borrowers by lenders. According to the Halifax, the house price to earnings ratio was 5.41 in January. While down from 5.59 in December, it was above the long-term (1983-2019) average of 4.27. Furthermore, mortgage lenders have been tightening their lending standards according to the Bank of England credit conditions survey. 

“On the positive side, real earnings growth has been picking up recently, and we expect further modest gains to occur in 2019. High employment is also supportive for the housing market while mortgage interest rates are still at historically low levels and still will be assuming that the Bank of England does raise interest rates gradually and to a limited extent.

“Meanwhile, the downside for house prices should be limited by the shortage of houses for sale. The latest RICS survey showed new instructions fell for a sixth month running in December, and for the 19th time in 24 months. Consequently, average stock levels on estate agents’ books in December remained mired close to the survey’s record low seen in February 2018.

“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.”