David Newnes, director of Reeds Rains and Your Move estate agents, owned by LSL Property Services plc, comments:
“Average house prices across England and Wales have climbed £20,938 in the past year. This 8.5% rise is the highest annual increase we’ve witnessed since August 2010, when the housing market was edging back from the throes of the financial crisis, and brings average property prices to a new peak of £266,013.
As the vigorous health of the UK housing market catches international and media attention, all eyes have been on how the government and regulators will react. However, the growing clamour for intervention neglects the fact that when taking inflation into account, only London and the South East have seen house price growth in ‘real’ terms since January 2005. London is in a league of its own, with prices climbing 13.3% on an annual basis. When you take the capital out of the equation, average prices across England and Wales have risen just 6.3% in the last year to £221,212. This price difference is the largest since our records began.
The national recovery is gaining strength, bringing with it renewed consumer confidence and a ‘feel-good’ factor to millions of households. In the past twelve months prices have risen in 91% of the unitary authorities across England and Wales. In fact, in April new record prices were reached in Cardiff, Bristol, Northamptonshire and Cambridgeshire, as growth spreads out from the capital and reaches across the rest of the country.
Annual growth in house sales slowed in May, potentially as a side-effect of the Mortgage Market Review (MMR) rules introduced at the end of April that have lengthened the mortgage approval process.
There are other indications of a cooling in the market – particularly at the top end of the spectrum in London. In total, twelve London boroughs have seen prices fall in April, with the exclusive Prime Central boroughs of Kensington and Chelsea and the City of Westminster seeing the largest monthly drop in house prices – down 2.7% and 2.9% respectively since March 2014.
But outside of the capital, the Help to Buy scheme continues to help first-time buyer demand, the engine driving some of the activity in the regions. If supply could follow suit, this would sustain the housing recovery and could help restore some equilibrium across the country.”
Dr Peter Williams, housing market specialist and Chairman of Acadata, comments:
House prices
For the eleventh month in succession, the average house price in England & Wales continues to rise to a record level. This month the new record average price is £266,013, which is £2,326, or 0.9% above the April figure. This is the fourth highest monthly increase that has occurred over the last year. Although some commentators have suggested that house prices are beginning to moderate, a view which we discuss in more detail on pages 10 & 13, our own conclusion is that the slow-down in prices, if it exists, is currently limited to the top end of the market and in prime Central London only. But we should also remind readers that our Index records prices at the time of contract completion, which may be some two or more months after the lender indices. These record prices at the time of mortgage approval, so others may be predicting a turning-point in the market which has yet to feed through to the Land Registry market data we use.
On an annual basis, the average house price has risen by a nominal £20,938, or 8.5%. This percentage increase is the highest annual increase in prices since August 2010, when the market was recovering from the 2007/2009 housing crisis. During that recovery period, the largest annual increase in average prices was recorded in April 2010 at 11.0%. We are therefore still some way below the price movements being experienced just over four years ago, although that was from a low base.
House prices in ‘nominal’ and ‘real’ terms
In the seemingly endless debate on house prices, much has turned on whether prices are excessive in nominal or real terms. For a variety of reasons, the Chancellor and the government have favoured the latter, being quick to dismiss concerns because real prices are still well below historic peaks. This month we have chosen to examine the issue in some detail. Figure 1 below provides an historic perspective on the housing market over the last nine years, showing the value of the average price paid for a home in England & Wales, both in ‘nominal’ and ‘real’ terms.
The Bank’s next move?
Given the continued strength of the market, gauging what might happen over the next few months in terms of any interventions the Bank of England might make in the housing market is difficult. What we do know is that the committee charged with considering what to do is the Financial Policy Committee (FPC) and that it meets on 17th June. Any decisions will probably be made public on that day or shortly thereafter; however the minutes of its meeting are not out till 1st July and the Financial Stability Report which will provide the detailed analysis will be published on the 26th June.
We know the FPC has been asked to review the Help to Buy 2 mortgage guarantee scheme in September, though it can choose to do that at any time. We also know that the powers it has are not directly related to house prices or transactions – instead they are directed at mortgage lenders through the Prudential Regulation and Financial Conduct authorities. Thus any formal interventions are going to be around the requirements to hold capital – in total or to back the loans being made, or via recommendations to the FCA or PRA on the underwriting standards for new mortgages. These would include the appropriate interest rate stress tests to be applied when assessing affordability and the specification of mortgage products in terms of length of loan terms or loan to value, debt to income or loan to income limits.
The history of Bank intervention is that it is normally gradual, and moves from informal ‘nudges’ to formal requirements. The Bank has no appetite to control the housing market and indeed lacks the powers to do so, but it will seek to influence the course of events if it thinks the market might impose risks for the economy and for households. The judgement call is then partly about whether the market is in need of intervention and here much turns on the quality of the information and on the time period under discussion. The Bank no doubt tracks a lot of data but it does tend to use seasonally adjusted data, e.g. on mortgage approvals.
This can distort the real picture, as can the use of the mortgage-based house price indices which are now lagging the whole of market measures by quite a margin. Short term runs of data can also be misleading, and not least given the sharp adjustment following the 2007 crash. Sharp rises from a low base can lead to very misleading headlines.
So reading the market accurately and in all of its geographical variations can be challenging, let alone the judgement call as to when to intervene and how! Recent interventions have been taking mortgages out of the Funding for Lending scheme and taking powers to address stress tests. Having just done the latter, it might seem too obvious to suggest this is where the FCA will go in the first instance; here it can make lender-facing adjustments which slowly impact on the market. The moves by LBG and RBS to curb large loans in London have sent messages to the market and it is possible that by the 17th more evidence will have emerged of selective cooling. If so, we may see the FPC hold fire and reconsider the position in September.
Housing Transactions
We estimate that the number of housing transactions that took place in England & Wales in May 2014 totalled 72,000, which is only 8% up on May of last year. We use the word “only” in this context as the growth in transactions for the ten month period July 2013 – April 2014, compared to a year earlier, had been running at an average annual rate of 33%. May therefore represents a slowing in the market, possibly due to the introduction of the new MMR rules at the end of April, which is reported to have slowed down the process of obtaining mortgage approvals. In fact mortgage approvals did actually fall on a monthly and non-seasonally adjusted basis, but only in April. It is very early days to be confident that we are identifying an MMR effect, since the Easter holidays also had an impact. As can be seen in Figure 2 below, the number of transactions per month in 2014 has been relatively constant, compared to the growth in the market experienced during 2013.
The CML reported that the number of loans for home-owner house purchases during Q1 2014 increased by 27% compared to Q1 2013. Over this period, first time buyers took out 68,800 loans, which was up 34% on the same period in 2013. Home movers took out 79,000 new loans, an increase of 20% on the previous year, and buy-to-let loans for house purchase during the quarter totalled 23,610, an increase of 38%. The figures show the importance of first time buyers in the current market place, representing 42% of all house purchases where a loan has been taken out. In addition to these figures are the cash buyers, who are perhaps more likely to be in the home-movers and buy-to-let sectors of the market.
