By Michael Baxter 10 Mar 2010 [1 Comment | 358 views]
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Last month was a tricky one for the housing market. Both the Nationwide and Halifax had prices down. The Bank of England’s latest data on mortgage approvals showed a sharp drop, and Hometrack was full of negativity sentiments.
But then again, you can’t read much into one month’s worth of data.
The snow may have been the main contributory factor. Once the sun comes out, maybe we will see the unleashing of demand pent up by snow and ice.
But the last few days have seen the release of two far more interesting reports. Rightmove has set the cat amongst the pigeons with news of a decline in the number of first-time buyers, and then yesterday the Royal Institution of Chartered Surveyors (RICS) set a positive pride of cats amongst the pigeons.
If the bad weather was the reason for poor home sales so far this year, then one would expect the drop in sales to be uniformly divided between first-time buyers and existing homeowners. And yet according to Rightmove, the proportion of people who expect to buy a property who are first-time buyers is falling like a stone. Or at least falling like a heavy feather. In its consumer confidence survey for Q1, Rightmove found that the proportion of first-time buyers who expect to buy is just 26 per cent, compared to 28 per cent in Q4 last year and 31 per cent in the quarter before that. To put this in context, the historical average is nearer 40 per cent.
Clearly first-time buyers are vital to the housing market because they sit at the front of the chain. If they go, then the market can only be sustained if we see a proportional rise in buy-to-let investors, or people buying a second home.
Meanwhile, RICS has released its latest housing market survey.
Its headline index, produced by asking surveyors if prices are up or down in their region, and subtracting the percentage number who said down from the percentage number who said up, fell to plus 17, from 31 the month before. The recent peak for this index was November, when it hit 35. The RICS index was in negative territory between August 2007 and July last year. Once it re-entered positive territory, the index continued to rise. But this trend now appears to have come to a halt and move into reverse. If the downward trend continues, then expect prices reported from the likes of the Nationwide and Halifax to follow downwards.
But what is especially interesting about the RICS index is that it also produces data which shows us what is going on behind the scenes.
For example, it publishes data on the number of new instructions recorded by estate agents, and the number of new enquiries. For as long as the index tracking enquiries is greater than the index tracking new instructions then one can expect underlying pressures pushing up on prices. And sure enough, this is what happened during the recovery in the market. In February last year, for example, when most expected house prices to fall sharply, the RICS index tracking new enquiries was plus 23, while the index tracking new instructions was negative 19.
It was a similar story over the following few months. The RICS index pointed to the rises in prices several months before they happened.
But in June last year, we saw the first hint that things might change. The index tracking new instructions went positive. At that time the signs still pointed to sharp rises as the index tracking new enquiries peaked, hitting the heady heights of 65. Since then, however, the trend has gone into reverse. The index tracking enquiries began to fall as the index tracking new instructions began to rise. In January, the index tracking new instructions passed the enquiries index. But in February the change became more marked. The index for new enquiries was plus 7; for new instructions it was plus 15.
The last eight months have seen a clear trend. There is a time lag between these trends being reflected in prices. If the trend continues for many more months, then house prices will start to fall again, and quite precipitously at that.
And by the way, the ratio of quarterly sales to stock fell in February too. This has been steadily falling now for several months.
The RICS data provides a good pointer to what will show up in the market a few months down the line. And right now, the data is pointing downwards.
Surely it is time that the media stopped referring to the “housing ladder” and instead call it the the “housing pyramid”? It seems to me to be far more descriptive of the nature of the market.
(And I always enjoy your great articles Michael, keep it up and many thanks)