The Housing Market
The Nationwide House Price Index (HPI) showed annual growth of 11.4% for Q2 2022. This was a decrease from the 12.6% rate of growth seen in the first quarter of the year. The latest monthly annual growth figure showed a slight increase from 10.7% in June to 11.0% in July. These levels of growth are remarkably strong given the wider economic context and particularly rising interest rates. This has surprised us, as while we expected growth to remain strong earlier in the year, we anticipated a more meaningful cooling by this stage.
This suggests that there is still unmet demand from people reassessing their housing needs as long term live/work arrangements crystalise. There is also likely to be a degree of acceleration of activity as people rush to lock in current mortgage rates before they rise further later in the year and borrowing becomes more expensive.
Zoopla reported a strong link between increased expectations of working from home and the scale of eagerness to move in the next 12 months, based on a consumer survey. Those who expect to work at home more were 5x as likely to move than those that expect no changes in working patterns.
Also, the removal of the mortgage affordability test by the Financial Policy Committee (FPC) last week may go some way to offsetting the impact of rising rates. In short, the change means that lenders can increase high LTV and high LTI lending which will help mitigate the affordability implications of rising rates. The question is to what extent lenders actually pass this onto consumers. It seems unlikely they will significantly extend higher risk lending when we are moving into a lower growth economic environment. Having said this the initially response from lenders shows some willingness with various announcements of new 90% LTV and 5.5x LTI products.
According to Nationwide the average price of a UK house is now £270,500. This represents a 24% rise in average house prices since the start of the pandemic and has pushed the house price to earnings ratio up to 8, well above the peak of 7.5 reached prior to the financial crisis.
Other measures of house prices paint a similar picture of the market. Halifax reported 11.8% annual growth in July, a fall from 12.5% in June but clearly still very strong and their average UK house price now stands at £293,200. The Land Registry House Price Index (HPI) which lags the other measures, recorded annualised growth of 12.8% in May a 1.2% increase on the previous month and put the average house price at £283,500.
Short term indicators suggest that while demand is cooling it remains strong and it will not be until later in the year that we see a significant slow-down in the rate of house price growth. Zoopla’s measure of buyer demand has slowed over recent months but remains 25% ahead of the five-year average pre-pandemic. Google searches for home purchases tell as similar story.
However, the RICS Residential market survey suggests demand further up the pipeline is softening. The RICS new buyer enquiries balance dropped to its lowest level since the start of the pandemic in June. In contrast, sales instructions have held steady, suggesting that the market will shift toward a buyers market later in the year
The extended Help to Buy scheme expired on 31st March 2021 following an extension due to Covid-19. An adapted version will now continue with a more limited capacity through to 2023. Under the new iteration, the government will still provide an equity loan of up to 20% for the purchase of a new build home to enable buyers with only a 5% deposit to acquire the remaining 75% through a mortgage. The previous price cap was replaced by significantly lower regional price caps, defined as 1.5 times the average price of a first-time buyer property for each region. While the original version of the scheme was used by over 270,000 home buyers since its inception in 2013, there were questions around its efficacy – many of which have persisted with the new changes. The latest evolution also may disrupt the viability of some developments which were targeting the Help to Buy market at above the new regional price caps.
ANNUAL CHANGE OF UK AVERAGE HOUSE PRICE
March 2021
Source: ONS
March 2022
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