Summer surge in prices subsides - Capital Economics
UK Housing

Summer surge in prices subsides

UK Housing Market Chart Book
Written by Andrew Wishart

Housing market activity is booming as pent up demand from the first lockdown is expended and buyers rush to take advantage of the stamp duty cut. There are some tentative signs, though, that the surge in house prices over the summer is starting to subside. And with employment likely to fall further, and the stamp duty cut and the furlough scheme set to end early next year, there is a growing possibility that house prices reverse their 2020 gains in 2021.

  • Housing market activity is booming as pent up demand from the first lockdown is expended and buyers rush to take advantage of the stamp duty cut. There are some tentative signs, though, that the surge in house prices over the summer is starting to subside. And with employment likely to fall further, and the stamp duty cut and the furlough scheme set to end early next year, there is a growing possibility that house prices reverse their 2020 gains in 2021.
  • Economic indicators show that the recovery stalled even before the second lockdown began. We think GDP will fall by 8% in November and remain on a lower trajectory thereafter, which suggests employment will fall much further. That will put downward pressure on house prices in 2021. (See Chart 1.)
  • Market conditions and search activity remained strong in September but there were some signs that buyer demand had started to cool, perhaps tempered by rising interest rates on high LTV mortgages.
  • Mortgage approvals and transactions have recovered strongly from the first lockdown, with approvals for house purchase reaching their highest level since September 2007. Agreed sales are still rising, so approvals and transactions will remain high for the next few months at least. But there are reports that surveyors and solicitors are struggling to keep up with demand, which may delay completions.
  • House price growth reached a four year high in October after house prices surged over the summer. But there is clear evidence in the regional data of a shift in demand away from dense city centres to the suburbs. Rental values in London look particularly vulnerable. At the national level, demand for rental properties has been resilient. But that may yet change as the fall in employment appears so far to have disproportionately affected renters. (See our Update.)

Chart 1: Employment & House Prices (% y/y)

Sources: Refinitiv, Nationwide, Capital Economics


Economic Indicators

  • The economic recovery has slowed with GDP rising by just 2.1% m/m in August, down from 6.6% m/m in July. And our CE Business Impact of Coronavirus Survey Indicator suggests that the recovery stalled completely in September and October, before the second lockdown in England began (2). We expect this lockdown to send the recovery into reverse and shrink the economy by 8.8% m/m in November (3).
  • Employment has “only” fallen by 566,000 since February, far less than the drop in GDP implies thanks to the furlough scheme (4). But with the scheme due to end in March we think that employment will fall by a further 1.3 million, putting downward pressure on incomes and house prices (5). Meanwhile the unemployment rate rose from 4.0% in February to 4.8% by September and may reach a peak of 9% at the end of next year.
  • The rise in CPI inflation from 0.2% in August to 0.5% in September, in part due to the Eat Out to Help Out discount ending, may mark the start of an upturn in inflation to 2% (6). But we think that it will settle below-target, around 1.5% in 2022. Earlier this month, the Bank of England announced a further £150bn of QE. We expect at least another £100bn more next year and that interest rates will stay at or below 0.10% for the next five years. So the 10-year gilt yield should stay very low (7).

Chart 2: Capital Economics BICS Indicator & GDP

Chart 3: Monthly GDP (February 2020 = 100)

Chart 4: GDP & Employment

Chart 5: House Prices & Employment (% y/y)

Chart 6: CPI Inflation (%)

Chart 7: Bank Rate Forecast & Gilt Yields (%)

Sources: ONS, Refinitiv, Capital Economics


Housing Market Data and the Home Buying Process

Steps in the process

Typical timeline

Available data

Published

by

Data
for

Latest Data

Prev.

data

Market Strengthening?

Begin search

10 weeks

Unsold property per surveyor (No.)

RICS

Sep

41

42

Y

New properties for sale (% bal)

RICS

Sep

39

45

N

New buyer interest (% bal)

RICS

Sep

52

63

N

Site visits (new housing, % bal)

HBF

Sep

-33

-16

N

Asking prices (% y/y)

Rightmove

Oct

5.5

5.0

Y

Use of sales incentives (% bal)

HBF

Sep

-2

-13

Y

Verbal offer

4 weeks

Agreed sales prices (% bal)

RICS

Sep

61

44

Y

New homes prices (% bal)

HBF

Sep

30

42

N

Net reservations of new homes (% bal)

HBF

Sep

-11

33

N

Agreed sales (% bal)

RICS

Sep

55

61

N

Price expectations – next 3m (% bal)

RICS

Oct-Dec

23

24

N

Sales expectations – next 3m (% bal)

RICS

Oct-Dec

17

21

N

Mortgage approval

4 weeks

Mortgage approvals (000s)

BoE

Sep

91.5

84.7

Y

House prices (% m/m)

Nationwide

Oct

0.8

0.9

N

Halifax

Oct

0.3

1.5

N

Exchange contracts

1 week

Completed sales per surveyor

RICS

Sep

14

14

Complete transaction

4-6 weeks

House prices (% m/m)

UK House Price Index

Aug

0.7

0.5

Y

Register transaction

Time elapsed

House prices (% m/m)

Acadametrics

Sep

0.7

1.1

N

24 weeks

House prices (% y/y)

Hometrack

Sep

3.0

2.5

Y

Property transactions (000s)

HMRC
Land Registry

Sep
Jun

98
46.4

81
33.1

Y
Y

Source: Capital Economics

Comment:
  • Measures of buyer and seller activity showed some tentative signs of easing in in September while homebuilders reported a sharp fall in buyer interest, with site visits down on a year earlier. The big picture, however, is that demand remained very strong leading to annual growth in asking prices and agreed sales prices rising.
  • Mortgage approvals for house purchase rose further above their pre-virus level of around 65,000 a month to 91,500 in September. Meanwhile transactions, which typically lag approvals by a month or two, recovered to their pre-virus level. The recovery in mortgage lending suggests that housing transactions will rise further over the next few months. But reports that strong demand is causing bottlenecks with solicitors and surveyors, and delays to completions, could prevent transactions strengthening as much as mortgage approvals have.
  • The surge in house prices over the past five months has taken annual growth to a four-year high. But the surge may now be petering out. Both the Nationwide and Halifax indexes recorded the smallest monthly increase in prices since June in October.

Market Conditions and Search Activity

  • Housing market activity remains strong, but there are some signs that it is beginning to be tempered by rising interest rates on high LTV mortgages. While it eased from 63.4 in August to 51.5 in September, the RICS new buyer enquiries balance suggested that buyer interest continued to surge (8). More urban regions, such as East Midlands and London, have seen a more muted increase in interest (9).
  • New buyer interest appears to have cooled more recently. Google searches for the property portals Rightmove and Zoopla fell in October and November, although they remain higher than before COVID-19 hit (10). Meanwhile housebuilders reported a drop in site visits and reservations to below the levels of a year earlier in September (11).
  • One reason demand appears to be cooling is probably the sharp rise in quoted interest rates on higher LTV mortgages, as banks respond to strong demand and mitigate against a possible decline in house prices in 2021 (12). With inventory still limited, however, we doubt there will be a sudden drop in prices in the very near term, even if buyer demand continues to cool (13).

Chart 8: RICS New Sales Instructions and New Buyer Enquiries (% Balance)

Chart 9: New Buyer Enquiries by Region
(% Balance)

Chart 10: Google Searches for Property Portals & RICS New Buyer Enquiries

Chart 11: Housebuilders’ Reported Net Reservations and Site Visits (% Balance)

Chart 12: Average Quoted Mortgage Interest Rates (%)

Chart 13: RICS Unsold Stock per Surveyor

Sources: RICS, Google, HBF, Refinitiv, BoE


Agreed Sales, Mortgage Approvals and Transactions

  • Mortgage approvals look set to rise further as pent-up demand is expended and buyers take advantage of the stamp duty cut. The rise in mortgage approvals for house purchase to 91,454 in September took it to its highest level since September 2007 (14). It seems likely that transactions will follow mortgage approvals higher over the next couple of months. But there is a possibility that reported delays with surveyors and solicitors hold completions back.
  • The drop in remortgaging may be a sign that banks are struggling to keep up with applications (15). And there is probably still more demand in the pipeline, as mortgage approvals are yet to make up the ground lost in the first lockdown and the RICS agreed sales balance remains very high (16 & 17).
  • The high level of sales, approvals, and transactions is likely to abate next year after pent-up demand is expended and the stamp duty cut ends. Indeed, RICS survey respondents expect sales to remain strong for the next three months, but to drop back next year (18). Finally, note that mortgage repayments have almost fully recovered to their pre-virus level, suggesting that the majority of those who took mortgage holidays have been able to resume servicing their debt (19).

Chart 14: Mortgage Approvals & Transactions (000s)

Chart 15: Mortgage Approvals (000s)

Chart 16: Mortgage Approvals for House Purchase (000s)

Chart 17: RICS Agreed Sales & Mortgage Approvals

Chart 18: RICS Sales Expectations (% Bal.)

Chart 19: Regular Repayments of Mortgage Principal (£bn)

Sources: Bank of England, HMRC, RICS, Capital Economics


House Prices and Rental Values

  • The surge in house prices since June appears to have started to slow, with both the Nationwide and Halifax house price indices both recording the smallest monthly increase since June in October (20). Despite the dip in the spring, house prices are up by about 5% in the year to date, and annual house price growth has risen to its highest pace in at least four years (21 & 22).
  • Regional house price data for August showed that Wales, the Midlands and the North West have been the strongest performing regions so far this year (23). London saw a more modest rise in house prices, and RICS respondents reported the smallest increase in prices there in September. That probably reflects the increase in working from home, which has shifted housing demand away from dense city centres to the suburbs. (See our Focus.)
  • The shift in owner occupier demand away from cities and London in particular is also evident in the rental market (24). But nationally rental demand appears to be strong despite the increase in unemployment so far falling disproportionately on renters (25). (See our Update.)

Chart 20: House Prices (% m/m)

Chart 21: House Price Indexes (Dec. 2019 = 100)

Chart 22: House Prices (% y/y)

Chart 23: YTD Change in House Prices & Surveyors’ Reported House Price

Chart 24: Rental Demand and Lettings Supply (% Bal.)

Chart 25: Rental Demand/Supply Balance and Rents

Sources: Nationwide, Halifax, RICS, Refinitiv, Rightmove, ONS, CE


Data Summary

Table 1: Alternative Measures of House Prices

% m/m

% y/y

Latest

Data

Avg. Price £000s

12m

earlier

Previous

Latest

12m

earlier

Previous

Latest

Rightmove (nsa)

Oct

323.5

0.6

0.2

1.1

-0.2

5.0

5.5

Nationwide (sa)

Oct

227.8

0.1

0.9

0.8

0.4

5.0

5.8

Halifax (sa)

Oct

250.5

0.2

1.5

0.3

0.9

7.3

7.5

Acadametrics (sa)

Sep

311.6

0.5

1.1

0.7

1.5

3.2

3.4

UK House Price Index (sa)

Aug

234.7

0.1

-0.5

0.5

0.6

2.1

2.5

Sources: Rightmove, Nationwide, Halifax, ONS, Acadametrics, Land Registry

Table 2: Mortgage Borrowing and Residential Property Transactions

Levels

% y/y

Year-to-date

September 2020

12m earlier

Previous

Latest

12m earlier

Previous

Latest

Previous year

Current year

BoE Net mortgage lending £bn, sa*

3.8

3.0

4.8

-0.1

-1.1

1.0

35.7

27.2

BoE Value of new approvals, £bn, sa

22.3

24.8

26.7

2.9

12.5

19.6

198.1

174.9

– For house purchase, £bn, sa

13.0

18.1

19.4

5.4

39.6

49.4

113.6

104.5

– For remortgage, £bn, sa

8.9

6.3

6.2

0.9

-27.8

-30.6

77.6

69.8

BoE Mortgage approvals, 000s, sa

Total

129.8

129.4

136.0

0.0

-0.3

4.8

1,162

953

– For house purchase, 000s

66.2

84.7

91.5

0.6

28.9

38.2

590

509

– For remortgage, 000s

49.6

33.4

32.7

0.4

-32.8

-34.1

440

349

– Other, 000s

14.0

11.3

11.9

-4.0

-21.6

-15.0

132

95

HMRC Transactions, 000s sa

98.7

80.8

98.0

-0.8

-16.7

-0.7

882

693

Sources: Bank of England, HM Revenue and Customs

*% y/y refers to change in level of £bn on previous year

Table 3: Regional Snapshot

Latest data

Ldn

S.E

E.A

Wal

S.W

Y&H

N.E

N.W

W.M

E.M

Scot

N.I

House prices, N’wide, %y/y

– Latest

Q3

4.4

4.9

2.6

3.8

5.5

4.6

4.2

3.1

3.1

4.0

2.0

1.5

– Previous

Q2

2.1

1.9

0.8

1.1

2.3

2.0

0.0

4.9

0.7

1.5

3.9

0.2

– Same period a year earlier

Q3

-1.7

-1.1

1.6

3.0

0.5

0.1

2.0

2.5

2.1

0.4

0.9

3.4

Property Sales, Land Registry

– ‘000s

Jun

3.7

6.6

4.8

1.8

4.5

4.2

2.0

5.4

3.9

3.9

3.8

N/A

– %y/y

Jun

-46.8

-42.5

-40.9

-56.2

-43.6

-41.4

-44.4

-43.6

-44.8

-42.2

-58.9

N/A

Sources: Nationwide, Land Registry


Andrew Wishart, Property Economist, +44 (0)7427 682411, andrew.wishart@capitaleconomics.com
Sam Hall, Assistant Property Economist, sam.hall@capitaleconomics.com