Rise of the housing sun

By Simon Rubinsohn

The good news in the residential market is set to continue – for a while at least

The latest RICS Housing Market survey suggests that the generally more positive tone now evident in the market is likely to persist for at least a while longer.

Significantly, the ‘headline’ net price balance has moved back into positive territory for the first time since July 2007. This brings it into line with the price indices compiled by the Nationwide Building Society and HBOS.

The price expectation series, meanwhile, continues to strengthen (graph 1). Seventeen per cent more surveyors anticipate price increases over the next three months rather than price declines – the best Reading on this measure since March 2007.

The other indicator that traditionally provides a good steer on the outlook for house prices – the sales-to-stock ratio – tells a similar story, having posted eight consecutive monthly increases.

As we have highlighted previously, a key driver of the firmer trend in prices is a lack of fresh stock being placed on the market.

Notwithstanding the fact that new instructions to estate agents have increased for two months in a row, the supply of property is still relatively low in relation to the rise in demand.

Mortgage bounce

The pace of growth in new buyer enquiries has slowed a little of late, but it remains relatively robust from a historic perspective (graph 2). This is translating into increased numbers of mortgages being approved.

Not so long ago a Bank of England release showing 50,000 mortgages being sanctioned in a month would have been received with a groan. But today it appears a much more encouraging result and represents almost a doubling of loan activity since the low in November.

Much has been made of a north-south divide in the housing market in recent months. The latest RICS survey suggests that such a stark interpretation needs to be treated with care. The net price balance is certainly strongest in London and the south-east, where new buyer enquiries are increasing particularly rapidly in the former.

However, the increase on July in newly agreed sales was most rapid in the West Midlands, while sales expectations grew at the fastest pace in the north-west.

Risks to the market recovery clearly remain. It would be complacent to assume that there is no danger of a relapse both in terms of volumes and prices over the next 12 to 18 months.

Unemployment is continuing to rise and, even though sentiment surveys suggest that the pace of job shedding may soon begin to ease, it is unlikely to stabilise any time soon.

Meanwhile, the cost of mortgage finance could resume an upward trend if the much-talked-about UK economic recovery eventually gains some traction.

That said, the latest round of reductions in the cost of secured lending suggest this point is some way off.

Predictably, the limited response from lenders to the sharp drop in the cost of wholesale money, as represented by swap rates (graph 3), demonstrates that, in general, banks and building societies are continuing to be cautious when it comes to issuing fresh loans.

The new deals on offer in early September were only 0.1% to 0.2% lower than the rates previously available, leaving margins on secured loans at unusually high levels.

It is, moreover, improbable that there will be a material shift in lender behaviour in the short term. The government’s mortgage guarantee scheme, which is designed to enhance the availability of mortgage finance has proved to be a damp squib.

And, although a few new overseas lenders have begun to dip their toes in the market, they are doing just that, rather than making a big attempt to gain a material share of the market. (Simon Rubinsohn, Property Week) http://www.propertyweek.com/story.asp?sectioncode=530&storycode=3149110

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