Overview
Following substantial increases in the price of property coming to market over the first five months of 2014, this month sees a marked change with prices at a virtual standstill. The average rise in new seller asking prices is just 0.1% (+£272), and while demand usually cools over the summer months, this marginal increase is below June’s 0.6% average over the last ten years.
More regions see falls than rises this month and all the fallers are in the north, with the notable exception of London, which records a drop of 0.5%. Though all regions have seen an increase in supply as more people decide to try to sell, the capital has seen a rush of new sellers. With the ebb in demand and the flow of extra property choice for buyers coinciding with the somewhat chaotic implementation of the new Mortgage Market Review (MMR) and its tighter lending criteria, the net result is that some of the momentum has been taken out of the market.
Miles Shipside, Rightmove director and housing market analyst comments:
“The London market powers the rest of the UK but is starting to run out of steam. While the legacy of rises in central London continues to ripple out to its better-value commuter-belt, fuelling price increases in all southern regions, London itself is now marking time. It’s an example to the rest of the country of what happens when affordability and common sense get stretched too far.
Through luck or judgement it appears that the timing of the Mortgage Market Review, more property for sale in all regions, and a tail-off in pent-up buyer demand are alleviating some of the upwards price pressure. This will come as a relief to the Governor of the Bank of England and the Financial Policy Committee, who have cited an over-heating housing market as a serious threat to economic recovery and have further powers to use should it get out of hand.”
There are early signs of upwards price pressure being reduced by a better, albeit belated, balance between supply and demand. Those buyers who are the first to react to an upturn often have nothing to sell, and there is a time-lag before existing home-owners are ready or able to commit to trade up, down or out in the marketplace. Better selling conditions in the first half of this year and increased confidence to take on the commitment of moving have finally unlocked more supply with new seller numbers up by an average of 9.6% year-to-date compared with 2013.
All regions have also recorded a month-on-month increase in properties coming to market, with the capital seeing the largest jump in new sellers, up by 23.2%.
Shipside observes:
“More supply means more choice for buyers and strengthens their negotiating hand, whilst it reduces the pricing power of sellers. As well as building more homes in the right places to satisfy demand, more churn of existing homes also helps, and that now seems to be happening, especially in London. Some sellers will be looking to cash in and possibly get a lot more house for their money further out, but they may have missed the peak in the rush to realise their gains as parts of London appear to have hit the upper limit price buffer.
This rise in the number of sellers has also been seen in the north, and when combined with this month’s price falls in five out of six northern regions, should put paid to some of the ill-informed national ‘bubble’ talk. While the jump in property supply is welcome and much needed it should be noted that average stock levels per estate agency branch are still well below those of last year, with shortages still pushing up prices in popular locations.”
Combined with the increase in supply, there are early indications of a slowdown in demand. The summer months traditionally see a drop-off in buyers, and this year it seems that the initial rush of pent-up buyer demand has started to slowdown, as many motivated and committed buyers have now completed their transactions.
Shipside notes:
“Many serious buyers who were waiting in the wings have now bought and moved in, taking a slug out of the pent-up demand for a few years to come, and the consequent chatter on the street is that quality buyers are now thinner on the ground. The next wave of buyers may have less motivation or ability to buy and sellers are going to have to be sensitive to their local market and not pitch their asking prices too high as choosy buyers will not arrange to come and visit.”
The tighter lending criteria introduced under MMR have also dampened demand, though it remains to be seen whether its clumsy implementation will result in only a temporary lull in mortgage approvals rather than a substantial permanent downturn. The most recent Bank of England mortgage approval figures for April were 17% lower than those in January, and when combined with this month’s price standstill it would seem unlikely that the Financial Policy Committee (FPC) will rush in extra measures on top of those already implemented by lenders in April under the MMR.
Whilst it remains to be seen how many potential buyers will fail to get the mortgage of their choice, at present lenders are still struggling with the extra paperwork and new requirements for consistency in underwriting standards. Estate agents are reporting an initial ‘knee-jerk’ reaction by some lenders, turning down mortgages previously agreed in principle leading to house sales falling through. The last-minute and apparent over-zealous implementation of MMR by some lenders and current delays in the mortgage application process make it hard to assess whether it will result in a long-term downturn in buyer demand.
Shipside says:
“The Bank of England has now reported three consecutive months of falling mortgage approvals and a major factor in this is the clumsy and apparent over-zealous implementation of MMR. It is certainly causing a major headache for some estate agents with U-turns by lenders meaning sales falling through and heartache for buyers and sellers who thought they had a deal agreed.
The MMR deadline has occurred at the busiest time of the home-buying year, without a co-ordinated consumer communication plan, and some ill-prepared lenders are struggling with new underwriting rules, shortages of appropriately qualified staff, and the work involved in processing the additional paperwork. When they do all get to grips with it, there is the possibility that this will turn out to be more of a temporary lull rather than a major reduction in demand.
However, at present it offers the FPC a reason to delay more stringent measures and hope that the balance between demand and supply is heading to a level where the more rampant price increases are being controlled.”
James Bailey of Nicholas Humphreys in Burton-on-Trent in Staffordshire comments on how MMR is affecting their market:
“MMR is having a major impact in the lower value sector of our market where buyers tend to be on lower than average incomes. Over half of the sales we agreed in May to buyers with mortgages previously agreed in principle have now fallen through due to those lenders belatedly applying different criteria. This may be the result of a knee-jerk over-reaction though at present it is hard to say whether this is just a temporary state of extreme risk-aversion until the tighter criteria are fine-tuned.”
Lucian Cook, Savills UK head of residential research, comments on the London market:
“We’ve reached a point where the gap between London and the rest of the country is becoming irresistible to London home owners who have for several years put off moving out. The result is more stock on the London market, lower levels of competition from buyers and slightly more realism from sellers when agreeing asking prices. The constraints on additional borrowing, particularly in the wake of the Mortgage Market Review, will be a further prompt to older first-time buyers or those looking to buy a larger home to look beyond London.”
Anthony Payne, Managing Director of Lonres, a London data provider to property professionals, comments on the improving supply and demand in some areas of London:
“A lack of supply combined with rising demand has been a key driver of house prices and a feature of the wider London market for some considerable time now. However the capital's housing market is wide ranging with different areas and price bands behaving quite differently. In prime central London we have seen supply levels rising steadily since the start of the year - by as much as 17% between January and April - suggesting that market conditions are changing.
With buyers starting to fall back too there has been talk in recent weeks of calling the top of the market. While this may be a cause of concern for some, for owner occupiers looking for a long term prospect, a home in which to live, an increase in supply and choice, it must come as welcome news.”
