By mwoolgar 10 Aug 2010 [4 Comments | 1,321 views]
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Don’t say you weren’t warned, but this morning the latest report from the Royal Institution of Chartered Surveyors (RICS) brought irrefutable evidence that the UK housing market is set to see price falls over the next few months. The headline index may suggest prices are falling now, but peek beneath the surface and look at the various other RICS indices, and it becomes clear this is just the beginning.
Every month RICS asks surveyors whether prices are up or down in their region. It takes the percentage number who say up, and subtracts from that the percentage number who say down, with the resulting sum forming its headline index. Over time this has proven to be a good barometer for the UK housing market. One of the nicer aspects of the RICS headline index is that the graph showing the history of the index is quite smooth, and does not suffer from the volatility seen with the Nationwide and Halifax indices which make it quite hard to extrapolate trends.
In July the headline index fell from plus 8 in the previous month, to minus 8. It was the first negative showing since July last year.
The index tracking price expectations fell to minus 28, from minus 6 in June.
But the really interesting indices relate to the movements beneath the surface. The index tracking new instructions, which affects supply, rose from plus 27 to plus 33, the highest reading since May 2007. The index tracking new enquiries, which relates to demand, fell from minus 6 to minus 10.
The index tracking instructions has been greater than the index tracking enquiries every month this year. But in recent months the gap between the two indices has been growing. RICS is not owning up to this, but surely the fact that the headline index has only just turned negative is a reflection of what these underlying indices were saying several months ago, and the recent developments are unlikely to show up in the headline index for a little while yet.
RICS said: “The average number of properties on surveyors’ books rose by 4.1 per cent on the month to 69.1. At the same time, the average number of sales per surveyor remained essentially flat at 16.6 (down 0.1 per cent on the month). As a result, the sales to stock ratio – an indicator of market slack – fell to 24 per cent, the lowest level since June 2009.”
A partial explanation for the rise in new instructions is the removal of HIPs. HIPs was a major disincentive for speculative sellers. It was also bad news for those who needed to sell, but had limited funds. In fact, HIPs may provide one of the explanations for why supply fell so sharply during the recession, leading to increases in the price of houses even while the economy was in the midst of its worst slowdown in decades.
The prognosis for the next few months is clearly down, but what about the prognosis beyond that?
Average property prices are clearly still too high. Talk is that first-time buyers really need to find a mortgage of around 25 per cent of a property’s value. This means they need to find around £40,000 just to buy an average home. Those who harbour the dream of buying a bigger property are well and truly … well, the word to describe their predicament is not appropriate for this column.
Property bulls talk about low interest rates helping affordability, but in the cold light of the post credit crunch era, people have woken up to the reality that it is not just interest that matters but also the cost of repaying the initial sum borrowed. And if you sign up to the school of thought that says deflation is a bigger danger than inflation, then mortgage holders no longer have the luxury of knowing inflation will erode the true value of their debt.
Hi Michael
When it comes to house prices, why don’t you use data from the Land Registry that formally records actual sales and values. I struggle with the credibility of figures provided by parties with so much self-interest, such as building societies and RICS, when there is independent and credible evidence available.
Kind regards
Paul
As above
Hi Michael,
Paul’s point is sound regarding historical data but Land Registry figures provide no guidance to likely future trends,whereas, it seems to me,the various indices produced by RICS do just that.
Brilliant newsletter ,as always,thank you.
Kind Regards,
Mick
Re comments above:
Well first of all Land Registry data lags some time behind the rest of the data. So, for example the Land Registry data for June was released on the 28 July. The following day Nationwide released its July report. In other words Land Registry data focuses the debate on a month which had already been covered by a plethora of other reports several weeks previously.
Secondly, Land Registry figures do not diverge significantly from the more topical data from the Nationwide and Halifax. Since June last year the average monthly house price increase from the Land Registry was 0.61 per cent. Looking at Nationwide and Halifax data for the same period, the average price rise was 0.51 per cent. So, sometime ago, I concluded the Land Registry didn’t tell us anything we did already know several weeks earlier.
Then there is the issue of knowing where to draw the line. There are so many monthly reports on the housing market, it would be quite absurd to cover them all, and I am sure readers of this newsletter would be bored silly if we did. So, we focus on Nationwide, Halifax, Hometrack (who often have quite good analysis), RICS, and for mortgage lending the Bank of England. Very occasionally, but usually only if they have said something of particular interest, we cover CML and BBA figures on lending.
If the feeling is, that the Land Registry should be added to that list, then moving forward that is easily fixed. I would be interested to know what readers think.