There seem to be stirrings in the UK housing market that suggest a strengthening recovery could be in the offing.
Buying interest is on the up, helped by historically low mortgage interest rates, and the latest report from the Royal Institute of Chartered Surveyors announced the strongest level of sales in more than two-and-a-half years.
Nevertheless, the ongoing fragility of the economy must raise doubts about just how robust a recovery to expect.
The key trigger to the improvement has been the contribution of the Funding for Lending Scheme. It may have had little impact in getting credit flowing towards the corporate sector but the availability of cheap funding has certainly ground down mortgage interest rates to all-time low levels, which has reduced mortgage servicing costs.
Less helpful, though, has been that lenders have bumped up mortgage fees by an average of around 8% so far this year. The Council of Mortgage Lenders may well reason that such a rise will be swamped by the effect of lower interest payments over the life of the mortgage. However, the fee has to be paid up front, and that is just like an additional deposit request.
Help to buy
Concern about the negative drag from high levels of deposit requirements prompted the proposed ‘Help to Buy’ initiative in the recent Budget.
The objective of the scheme is to strengthen the mortgage market through loan guarantees. Details are, at present, lacking but that has not stopped several observers from regarding it as a potential game-changer.
The Item Club recently came out with a forecast that the scheme would likely assist in boosting housing transactions to more than one million in both this year and next.
Estate agents, too, are optimistic that the sector is moving into a stronger period of growth. Almost 80% of those surveyed by Hometrack are more upbeat than they had been at the beginning of 2012.
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Why the greater optimism? They see a more realistic approach to asking prices and a more widespread availability of mortgage finance as the driving factors.
Doubts
However, there are serious fundamental reasons for doubting the likelihood of a robust recovery. The economy remains fragile, with economic growth continuing to disappoint.
Although employment growth has exceeded most expectations, the gains have been down to wage moderation – employees have been more concerned with getting a job and holding it, rather than pushing for higher wages.
Average earnings growth has slumped to less than 1.5%, a negative real gain set against Consumer Prices Index inflation of 2.4%. This squeeze on household spending power has certainly been reflected in consumer confidence findings.
Sentiment has yet to recover towards pre-crisis levels, and that includes perceptions of personal income prospects and whether it is a good time to make a major purchase. A broad-based housing market recovery will await a pick-up in confidence.
Affordability
Affordability is a key factor in deciding whether to buy a house or not. We know the cost of servicing mortgages is at an all-time low, and that deposit requirements are relatively high.
House prices, themselves, are somewhere in between, with average house prices down more than 10% since their 2007 peak – but that compares with falls of over 30% in the US. Additionally, the average house price to income ratio is presently around 6.75 – certainly down from a peak of 8.5 but still well above the longer-term average of closer to 4.
With house prices still well above ‘affordable’ levels, and in continuing uncertain economic times, more and more households are shying away from home ownership – down more than 200,000 in the last four years – and opting for the more flexible option of renting.
It seems likely that pent-up demand will drive a modestly stronger housing market recovery in the UK this year. The greater likelihood, though, is that the recovery will prove to be modest, given continued economic fragility and the fact that, in general, house prices are nowhere near ‘cheap’.
This feature originally ran in Professional Adviser
