In line with our risk management framework, today we published our Q4 2019 performance update.
Our view of the property market
One of the points raised by the Remain camp during the EU referendum debate last year was that Brexit risked sending the property market into a spiral. Nearly a year on from the vote, and with Article 50 of the Lisbon Treaty having been triggered two months ago, it seems pretty safe to say that such a prophecy has not come to fruition, and shows little sign of doing so.
Indeed, according to a survey published this week by Zoopla, 87 per cent of homeowners believe that property prices will rise in the next six months, which in itself marks a 4 per cent increase from a similar survey conducted by the company last October. In turn, just 17 per cent are planning to sell up in the next six months, which represents a 6 per cent decrease from October’s study, and suggests consumer confidence is strengthening.
A recent Nationwide survey did reveal that prices have dropped off slightly over the last two months. Transactions, too, dipped in April. However, these have largely remained steady since the referendum, while the number of first-time buyers remains on the up.
Not much to see here then, right?
Points of concern
It must be noted that house prices alone – and expectations thereof – are not in itself a decisive measure of the overall health of the housing market, and certainly there are some weaknesses amid the positive sentiment. Firstly, much of the continued transactional activity has been stimulated by record-low mortgage rates, along with bonus-scheme incentives sponsored by Government.
With respect to mortgages in particular, there are two fault lines. Firstly, what will happen when the Bank of England decides to hike rates, as they’ve indicated they will likely do in the near future should inflation continue to rise? Secondly, even with such cheap mortgages, the proportion of income spent servicing them isn’t actually falling, given the poor performance of real wage growth in recent years.
Following on from that, the other headwind is the crippling cost of deposits. The ONS estimates that the median annual wage is currently £28,200, while the average deposit required for a home-mover is £45,000. Yet back in 1999, the corresponding figures were £17,800 and £9,500 respectively. What this means is that the level of pre-tax wages required to cover a house deposit has shot up from 53 per cent to 160 per cent in just 18 years.
Little wonder then that the Bank of Mum and Dad was revealed as the UK’s ninth-biggest mortgage lender last week, as family wealth becomes an increasingly significant determinant of who is able to get a foot on the property ladder, and who isn’t.
And in London, there are signs that the market is in the midst of a slowdown, with new-build properties ostensibly being harder to shift, given sky-high prices. It could simply be a London-specific recalibration of a previously-overheated market, but either way, ‘For Sale’ signs seem to be going up quicker than these properties are being sold.
Assessing the overall picture
None of the above concerns suggest that a house price crash is imminent, and the bullish attitude among consumers and homeowners is unequivocally a good thing. Cynics would of course also point out that while a chronic shortage of housing persists, the mismatch between demand and supply will invariably exert upward pressure on prices anyway (albeit that it is a rather simplistic argument to make).
There is thus very little justifiable need for jitters at this stage. However, it is clear that the housing market is, at best, unbalanced and flawed. So far solutions produced by politicians such as stamp duty tax increases, savings incentives and other policies have done little to correct this. With the General Election now just a few weeks away, we await with interest to see what the various parties’ plans are to firm things up, and to ensure long-term sustainability and inclusivity of a market that is in need of a health check.
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