Tight market could drive prices higher still - Capital Economics
UK Housing

Tight market could drive prices higher still

UK Housing Market Chart Book
Written by Andrew Wishart

There were signs that buyer demand would hold up well this year even before the government announced the extension to the stamp duty holiday in the Budget. Since then, Google searches for property portals have surged to a six-year high. A further strengthening in buyer demand when sales were already very high, and supply limited, suggests that house price inflation could accelerate further in the near-term.

  • There were signs that buyer demand would hold up well this year even before the government announced the extension to the stamp duty holiday in the Budget. Since then, Google searches for property portals have surged to a six-year high. A further strengthening in buyer demand when sales were already very high, and supply limited, suggests that house price inflation could accelerate further in the near-term. (See Chart 1.) What’s more, with the virus data looking very promising and the furlough scheme extended to September, the risk of a big rise in unemployment has diminished. Combined with the housing specific measures in the Budget, that led us to revise up our forecast for house price inflation this year from -4% to +3%. If anything, the strength of the latest data suggests the risks to our new forecast are to the upside.
  • Economic indicators suggest that we are on track for a rapid consumer-led recovery when restrictions are eased in line with the government’s “road map”.
  • Market conditions and search activity show strong demand and high sales volumes but limited supply.
  • Mortgage approvals and transactions declined a little at the start of the year but given strong buyer demand and the backlog in conveyancing, that won’t mark the start of a trend.
  • House prices look set to rise further given strong demand relative to supply and further policy support. Meanwhile, rental values might not have much further to fall in London as demand in the capital has started to recover.

Chart 1: Ratio of Sales to Stock & House Price Inflation

Sources: RICS, Nationwide, Capital Economics


Economic Indicators

  • A ramp up in COVID-19 testing as schools reopened has caused case numbers to stabilise, but the test positivity rate continues to fall suggesting that the government will be able to ease restrictions as planned (2). As a result, the dip in GDP in January to 9% below its pre-virus level should mark the low point before the activity recovers quickly (3). We think that the economy will return to its pre-virus size early next year.
  • The extension of the furlough scheme to the end of September should allow GDP to recover enough to prevent further falls in employment (4). So most job losses may already be behind us. We have reduced our forecast for the peak in the unemployment rate from 6.5% to 6.0%. Meanwhile government support to incomes and lower spending continue to boost household savings (5).
  • Inflation is likely to breach the BoE’s 2% target later this year as energy prices turn from a drag into a boost (6). But core price pressures are likely to take much longer to surface, so we doubt that the MPC will raise Bank Rate before 2023, which is the current consensus among investors (7).

Chart 2: GDP

Chart 3: Virus Cases & Test Positivity Rate (7-Day Ave.)

Chart 4: GDP & Employment

Chart 5: Households Cash holdings (M4 Ex., £bn m/m)

Chart 6: Contributions to CPI Inflation (ppts)

Chart 7: Bank Rate (%)

Sources: ONS, Refinitiv, Gov.uk, BoE, 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

Feb

43

43

Y

New properties for sale (% bal)

RICS

Feb

-29

-40

N

New buyer interest (% bal)

RICS

Feb

-9

-29

N

Site visits (new housing, % bal)

HBF

Jan

-39

-34

N

Asking prices (% y/y)

Rightmove

Mar

2.7

3.0

N

Use of sales incentives (% bal)

HBF

Jan

-5

-5

N

Verbal offer

4 weeks

Agreed sales prices (% bal)

RICS

Feb

52

49

Y

New homes prices (% bal)

HBF

Jan

27

14

Y

Net reservations of new homes (% bal)

HBF

Jan

10

2

Y

Agreed sales (% bal)

RICS

Feb

1

-17

Y

Price expectations – next 3m (% bal)

RICS

Feb-Apr

11

-12

Y

Sales expectations – next 3m (% bal)

RICS

Feb-Apr

6

-27

Y

Mortgage approval

4 weeks

Mortgage approvals for Purchase (000s)

BoE

Jan

99.0

102.8

N

House prices (% y/y)

Nationwide

Feb

6.9

6.4

Y

Halifax

Feb

5.2

5.4

N

Exchange contracts

1 week

Completed sales per surveyor

RICS

Feb

19

18

Y

Complete transaction

4-6 weeks

House prices (% y/y)

UK House Price Index

Dec

8.5

7.1

Y

Register transaction

Time elapsed

House prices (% m/m)

Acadametrics

Feb

8.6

8.2

Y

24 weeks

House prices (% y/y)

Hometrack

Jan

4.3

4.3

N

Property transactions (000s)

HMRC
Land Registry

Jan
Oct

122
90.0

125
73.5

N
Y

Source: Capital Economics

Comment:
  • The small decline in transactions and mortgage approvals in January won’t be the start of a downward trend. Indeed, the number of sales per surveyor recovered to 19.1 in February, matching the five-year high reached in November last year.
  • Admittedly, the RICS new buyer enquiries balance remained in negative territory in February. But the extension to the stamp duty holiday announced in the Budget has since pushed Google searches for the property portals Zoopla and Rightmove to their highest level since 2015.
  • High sales and strong demand but limited stock mean further gains in house prices are likely in the coming months. We wouldn’t put too much weight on the decline in Rightmove asking price inflation because it was driven by the base effect of a strong January in 2020, rather than a loss of house price momentum this year. Indeed, the RICS agreed prices balance remains very high.

Market Conditions and Search Activity

  • New buyer demand shows no sign of weakening with web searches for homes for sale rising to their highest level since 2015 in the first two weeks of March, no doubt bolstered by the extension to the stamp duty holiday announced in the Budget (8).
  • While sales volumes have surged stock has not, leading to a tighter market (9). Rightmove reports that the number of enquiries received per property was the highest ever at the start of March. The stronger rebound in RICS buyer enquiries than in seller instructions in February suggests that this isn’t going to change soon (10).
  • Housebuilders have benefitted from high demand and limited second-hand stock. Net reservations were up year-on-year in January despite site visits being depressed by the lockdown (11). At the current pace of sales, most regions only have about six months of stock, below the post-financial crisis average of ten (12). London is a notable exception and will also benefit least from the stamp duty taper (13).

Chart 8: Google Searches for Property Portals & RICS Newly Agreed Sales

Chart 9: RICS Sales & Stock Per Surveyor

Chart 10: RICS New Buyer Demand & Seller Instructions (% Balances)

Chart 11: New Build Site Visits & Reservations (% Balances)

Chart 12: Months of Unsold Stock

Chart 13: Stamp Duty Cost (£)

Sources: Google, RICS, HBF, Gov.uk, Capital Economics


Agreed Sales, Mortgage Approvals and Transactions

  • Mortgage approvals and transactions slipped back in January, but remained well above pre-COVID-19 levels (14). And even before the Budget announcements, surveyors revised up their assumptions for home sales. A majority expect them to rise further in the next three months (15).
  • While mortgage approvals are up 46% y/y over the past six months transactions have lagged behind so there may already be a backlog of around 100,000 purchases in the conveyancing process (16). As a result, buyers coming to the market now will have difficulty completing in time to meet the stamp duty holiday deadline, even after the extension.
  • High LTV mortgage availability remains limited and mortgage rates on the products that are available are high (17). The mortgage guarantee scheme is likely to have some success in improving availability, as did the previous incarnation of the scheme in 2013 (18). But mortgage rates on high LTV loans are unlikely to drop sharply. In any case, first time buyer demand has been resilient to the squeeze on high LTV lending, although the larger boost to sales volumes has come from home movers (19).

Chart 14: Mortgage Approvals & Transactions (000s per Month)

Chart 15: RICS Sales Expectations (Balance, %)

Chart 16: Mortgage Approvals & Transactions (Feb. 2020 = 100)

Chart 17: High LTV Mortgage Interest Rates & Availability

Chart 18: New Mortgages per Quarter

Chart 19: Gross Advances for House Purchase (£bn)

Sources: Refinitiv, RICS, Moneyfacts, Bank of England, FCA, HMT, CE


House Prices and Rental Values

  • The Nationwide and Halifax house price indices suggest that house price inflation has stabilised at a high level at the start of the year (20). Annual growth in Rightmove asking prices has cooled, but that was due to a base effect of a large rise in prices in January 2020 (21). Asking prices rose on the month in both February and March this year.
  • High sales volumes relative to stock levels suggests that house price inflation could accelerate further in the coming months (22). Indeed, most surveyors now expect prices to be higher than they are now in three months’ time (23).
  • Inflation in the ONS private rents index ticked up from 1.2% to 1.3% in January. But the drop in Zoopla’s measure of rents on new lets suggests that it will fall back to zero later this year (24). That said, the RICS survey shows rental demand strengthening. And notably, demand in London has started to recover after steep falls in 2020 (25).

Chart 20: House Price Indices

Chart 21: House Prices (% y/y)

Chart 22: Ratio of Sales to Stock & House Prices

Chart 23: RICS House Price Expectations (% Balance)

Chart 24: Zoopla New Let Prices (% y/y)

Chart 25: RICS Rent Expectations

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


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)

Mar

321.1

1.0

0.5

0.8

3.5

3.0

2.7

Nationwide (sa)

Feb

232.9

0.2

-0.2

0.7

2.3

6.4

6.9

Halifax (sa)

Feb

251.7

0.0

-0.4

-0.1

2.8

5.4

5.2

Acadametrics (sa)

Feb

333.3

0.8

1.0

1.1

2.2

8.2

8.6

UK House Price Index (sa)

Dec

248.8

0.0

1.2

1.3

0.9

7.1

8.5

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

Table 2: Mortgage Borrowing and Residential Property Transactions

Levels

% y/y

Year-to-date

December 2020

12m earlier

Previous

Latest

12m earlier

Previous

Latest

Previous year

Current year

BoE Net mortgage lending £bn, sa*

3.8

5.3

5.2

0.6

1.3

1.4

3.8

5.2

BoE Value of new approvals, £bn, sa

24.3

29.2

28.3

11.0

26.2

16.2

24.3

28.3

– For house purchase, £bn, sa

14.2

22.8

21.7

16.0

69.8

53.1

13.0

21.7

– For remortgage, £bn, sa

9.1

6.4

6.3

5.2

-27.0

-30.6

8.9

6.3

BoE Mortgage approvals, 000s, sa

Total

134.9

150.3

144.6

4.5

16.5

7.2

135

145

– For house purchase, 000s

70.7

102.8

99.0

7.3

53.3

40.0

71

99

– For remortgage, 000s

50.5

33.7

32.4

4.2

-30.3

-35.9

51

32

– Other, 000s

13.7

13.8

13.2

-7.1

1.0

-3.3

14

13

HMRC Transactions, 000s sa

121.6

124.6

121.6

98.0

26.6

24.1

98

122

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

Q4 20

6.2

8.0

6.4

6.6

6.4

7.6

6.4

8.0

7.4

8.5

3.1

5.9

– Previous

Q3 20

4.4

4.7

2.7

3.9

5.6

4.7

4.2

3.1

3.2

4.1

2.0

1.6

– Same period a year earlier

Q4 19

-1.8

-1.1

0.1

1.4

1.4

1.5

2.6

1.8

2.6

0.4

2.7

1.0

Property Sales, Land Registry

– ‘000s

Oct

6.9

11.9

7.9

3.7

8.1

7.0

3.4

9.1

6.4

5.9

12.2

N/A

– %y/y

Oct

-13.3

-7.5

-11.4

-13.4

-7.3

-8.3

-1.0

-11.9

-17.1

-15.4

29.1

N/A

Sources: Nationwide, Land Registry


Andrew Wishart, Property Economist, +44 (0)7427 682411, andrew.wishart@capitaleconomics.com