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Talking Point - The Housing Market

The UK housing boom reached its peak in 2007 but since then, house prices have taken a serious knock, ravaged by the credit crisis and the effects of the recession. However, recent data now suggest the market is showing signs of stabilising.

The Nationwide suggests that house prices have now risen for four months in a row (to the end of August) which should come as welcome news for many beleaguered householders – but does it herald the start of a genuine recovery?

The British Bankers’ Association (BBA) recently announced that mortgage approvals remained near their highest level for a year during August, and rose by 4.6% on an annualised basis. However, this rise is partly a reflection of the very weak figures of August 2008, rather than simply a fundamental upturn in the housing market. In fact, data from the Bank of England (BoE) show that the number of mortgage approvals is still only half the total granted in the late summer months of 2007.

Nevertheless, lenders remain cautious about the outlook for house prices and their mortgage deals remain expensive and in limited supply as they continue to shore up their balance sheets. The latest Financial Stability report from the Bank of England shows the concentration of lending to only the highest quality clients with little business being done with anyone else.
 
Indeed, recent rises in house prices are widely believed to be attributable to a lack of supply rather than any fundamental market recovery. Ernst & Young’s Item Club expects the UK housing market to get worse before it gets better as tight credit conditions continue to linger, warning that current signs of recovery are a “false dawn” caused by a shortage in supply. The Item Club believes prices will dip in the first six months of 2010 and then to stagnate for a further two years, and does not expect prices to regain their 2007 levels for another five years.

For now, lack of supply is the principal driver of house-price rises, while exceptionally low interest rates are attracting some buyers, with growth in demand particularly strong amongst buy-to-let investors and cheaper properties.  However, UK unemployment is now at 2.5 million and the outlook for jobs remains far from positive. The CBI expects unemployment to continue to rise – as far as 3 million in 2010 – even after the UK economy returns to growth, and this could place further pressure on the UK's still-fragile housing market.

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