Key Findings
· Average asking prices fall by 2.2% (£5,102) as summer sellers price more realistically
· Rightmove sees record traffic month as ‘marginal’ buyers search hard for property that meets
their restricted loan parameters and the ‘creditworthy’ trawl for limited supply of quality homes
· Sentiment continues to improve as 75% of home movers don’t expect prices to fall in the next 12months
· New sellers in August 48% below pre-credit crunch numbers as tight mortgage lending criteria continues to restrict transactions and stifle property coming to market
This month’s fall of 2.2% in new sellers’ average asking prices comes in spite of fresh stock scarcity and record search activity on Rightmove. It re-enforces the fact that we will see a period of bumping along the bottom before we return to consistent growth in house prices.
Miles Shipside, commercial director of Rightmove comments:
“After several months of activity and prices revving upwards from last winter’s low point, both will start to hit the limiter without more mortgage finance. In spite of pent up demand, the market and pricing is boxed in by restrictive lending criteria put in place to ration mortgages given the lack of funds available to lenders”
The average drop equates to £5,102. Those marketing in the summer holiday season tend to be more aggressive with their pricing as they usually have a strong reason to market when most people are contemplating their annual break from the stresses of the year. Indeed, this month’s fall virtually mirrors the 2.3% drop of August last year. It fits more with a traditional seasonal pattern, rather than an early signal of a return to further falls as predicted by the proponents of a double dip scenario. Nonetheless it is still the largest fall seen this year, which had previously recorded rises in 5 out of 7 months. The annual rate of increase remains unchanged, still registering a year-on-year fall of 3.1%, tying in with our forecast that average asking prices are unlikely to see further upward movement in 2009.
Future price and transaction growth is now controlled by the bottleneck of mortgage availability. This is unlikely to change for years to come, with the Centre for Economics and Business Research (CEBR) forecasting that mortgage application levels will recover slowly and remain well below the levels seen in the early part of this decade as far ahead as 2013. Even in 2013 the CEBR state that numbers will still be 24% below 2006 levels. This may well reflect a paradigm shift in access to mortgage lending. While HSBC is the only major lender to have taken a more proactive stance and increased its market share, its reported average loan-to-value of circa 50% on new mortgage lending is a perfect illustration of the new era of both caution and cherry picking.
Shipside adds: “Lenders are looking to remove as much risk as possible from their mortgage book. While the government’s left-hand is waving them on to lend to more home movers and small businesses, the right-hand is effectively flagging them down again by urging lenders to re-build balance sheets and improve capital adequacy”.
Borrowers will hope the additional funds made available for quantitative easing by the Bank of England will assist some lifting of the current mortgage cap. Ironically the batch of existing mortgage holders about to come off their 2 year fixed-rate deals, given current base rates, could see their monthly mortgage payments reduce.
However, their opportunity to take a further-fixed rate is denied by house price falls reducing their equity below lender’s new thresholds. Should this happen, and they are forced to revert to their current lenders’ standard variable rate, they become exposed to any future inflationary pressures forcing up base rates. This is a tranche of possible involuntary future sellers should they get into financial stress, though more likely they will stay put as they are unable to borrow more from their existing or new lenders to fund a move. This will exacerbate the dearth of new sellers coming to market.
Shipside comments: “Former equity releasers or those who bought in the last few years with high loanto - value ratios used to have the choice of a range of mortgage products, giving them the option of refinancing and possibly moving up the housing ladder. Many are now trapped on standard variable rates and are beholden to the MPC and the policies of the state backed institutions that hold many of the outstanding mortgages. With the second anniversary of the credit crunch, there is still little sign of a speedy recovery, meaning it is only the creditworthy that are insulated from the mortgage famine”.
When debating a housing market recovery there are three distinct groups to consider:
- The ’Creditworthy’, who once they have cleared the mortgage hurdles of substantial deposit, credit score and income multiples are rewarded by historically attractive interest rates. This group will be more heavily concentrated in London and the South, where the new stock shortages tend to most severe.
- The ‘Marginals’, looking to borrow 75% loan-to-value and above, who have to be squeaky clean on credit history and earning ratios. Lenders now get increasingly nervous with this group as their needs rise into the 80% to 90% loan-to-value bands.
- The ‘Minimalists’, an unfortunate casualty of the credit crunch. Those with more minimal means,
previously welcomed and encouraged by lenders to borrow to fund house purchase, promoting
unsound foundations beneath the upwards price spiral. These are now effectively excluded from the market and many may never be able to return, having long term consequences for transaction and new seller numbers
Shipside comments: “The activity of the Marginals group is the one to watch, as they include the vital first-time buyers whose shift to creditworthy status will herald the return to greater transaction volumes and enable more sustainable house price growth. Price growth is also required to enable owner-occupier Marginals to re-build their equity and come into play as ‘trader uppers’ and future sellers”.
Both the Creditworthy and Marginal groups appear to be searching long and hard for the best buys. Last month Rightmove’s traffic was the best ever recorded, an unusual event to occur in July as it typically signals the start of the summer lull in housing market activity. With less property coming to the market, would-be buyers have to sift through older stock to re-consider its suitability given the dwindling lack of fresh options. The Rightmove website recorded 585 million property pages viewed in July, beating the previous high of 568 million reached 16 months ago. Realistically priced new stock and old stock that has been reduced in price may now fall into the limited affordability range of Marginals, whose price parameters are now closely controlled by lenders.
Improving buyer sentiment has also played a major part in increased search activity. The early findings from the latest Rightmove Consumer Confidence Survey, due out next week, show that three-quarters of the 36,000 respondents do not expect prices to fall in the next 12 months. This is a marked contrast to their views in January, when two-thirds expected prices to be lower 12 months out.
The number of new sellers measured this month is 82,700. This is 23% lower than the 106,855 recorded in the depressed falling market of last August, and is dramatically down on the pre-credit crunch seller numbers of 149,000 and 167,000 in 2007 and 2006 respectively.
This month’s figure represents a 48% reduction on the average of those 2 years, a clear indication of the stock shortage peculiarities of this credit-starved downturn compared to previous recessions.
Shipside concludes: “It is highly likely that the historic norm of new sellers coming to market is consigned to the history books. Even with a return of equity, employment and wholesale mortgage funding, these levels of sellers may never be seen again”.
Summer selling patterns give rise to some exaggerated regional monthly swings, whereas a quarterly rolling average gives a smoother trend line. East Anglia is a case in point, where this month in isolation sees an 8.3% fall, though over the quarter the region shows overall stability with a 1.1% gain.
Representing less than 5% of the new stock coming to market, this monthly distortion has only a marginal influence on the national figures.
