Normal service resumed

By Simon Rubinsohn

The housing market recovery is in full swing but challenges remain

It is becoming increasingly difficult to ignore the turnaround in sentiment in the housing market. Activity continues to grow, prices are starting to pick up and expectations of the number of likely repossessions are being downgraded.

The latest RICS housing market survey certainly provides further evidence that the residential property cycle has passed its low point.

In June, new-buyer enquiries rose sharply once again on the previous month. This is the eighth consecutive monthly increase and the biggest gain since the series began back in 1999.

Moreover, this level of interest is clearly feeding through into actual transactions. The net balance of surveyors reporting a rise in newly agreed sales jumped to +41% in May (graph 1). In addition, data on the average sales per surveyor – which provides a hard figure for the number of transactions that have taken place over the previous three-month period – shows a broadly similar trend.

History lessons

But although the level of activity is considerably higher than during the latter part of last year, it is still significantly below historic norms. Bank of England data on mortgage approvals showed that more than 43,000 secured loans were agreed in May. This compares with around 27,000 in November but also with a monthly average of around 94,000 over the past 17 years.

This increase in demand is having some impact on house prices. Nationwide Building Society recently announced that prices had risen during three of the last four months – a trend that continues to be supported by RICS figures.

The sales-to-stock ratio, probably the best lead indicator of house price inflation, has risen for six months in a row and stands at its best level since March 2008. In addition, the price expectations series moved into positive territory last month for the first time since the middle of 2007.

A key reason why prices appear to have turned around in the uncertain economic climate is the lack of new supply coming on to the market. The RICS new instructions net balance is admittedly a crude measure, but it has given a negative reading for every month since June 2007. Meanwhile, the inventory on estate agents’ books (graph 2) has plunged by a third over the past year. The collapse in supply appears if anything to be accelerating.

With housing sentiment improving, some ‘reluctant landlords’ may choose to put their properties back on the market. This could lead to a modest improvement in supply over the coming months. However, it is more likely that low interest rates coupled with the relatively high yields on offer will encourage many multiple homeowners to hold on to their existing property portfolios.

Beautiful south

The regional story has not changed much over the past month. New-buyer enquiries continue to grow in London and the south-east.

This pattern is reflected in the areas where price expectations are most upbeat.

However, there appears to have been a significant improvement in sentiment in the north, which has lagged behind until recently. Buyer interest in the region has picked up markedly, the number of newly agreed sales is rising and price expectations, having been heavily negative, are almost stabilising (graph 3).

A word of caution: as we have said in previous months, there remain challenges for the housing market. Unemployment continues to rise and mortgage finance is set to remain in short supply.

The recovery is unlikely to be smooth, despite the rise in prices that has resulted from the shortage of stock. (Simon Rubinsohn, Property Week)


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