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Assetz House Price Watch May 2008

Assetz House Price Watch is the only fully inclusive summary of all the major UK house price indices, providing a comprehensive overview of market activity

The five major UK house price indices show an average of 0.3% annualised growth for the twelve months prior to May 2008. This shows a decline in the annual rate of growth recorded in April 2008 (1.7%) and a 10.6% decrease from the May 2007 annual growth rate of 10.9%. 

Annual house price growth declined for the ninth consecutive month in May, recording the smallest annualised growth since the HPW began in 2005.  However, when looking at data showing three month average house prices – which takes all of the recent volatility out of the data, reflecting real quarterly trends, it is clear we are currently witnessing a slow rather than a dramatic fall in prices.

The average house price in May 2008, taken from the average price provided by all five major UK indices, showed a decrease of £1,741, compared with the previous month’s average figure and a fall of £238 in the twelve months from May 2007, when the average price of a home was £209,917.

New housing starts have collapsed…

The recent stabilisation in house price growth has provided a necessary correction in the market. However, the impact of the credit crunch and the recent slowdown and limited availability of credit through mortgages is restricting buyers. As a result, new home sales have collapsed, leading to a huge fall in new starts on site by developers, further hampering what is already a limited supply of new homes. Once the current supply is exhausted there will be little new supply of housing on the market for the next two years + and even once development starts again, the industry is expected to have lost a huge percentage of its capacity through job-losses and development/construction company closure.

Pent up demand…

There is currently a great deal of pent up demand from buyers who are eager to buy but cannot secure the necessary finances. As a result, as soon as the mortgage market improves, a surge of activity is expected, as buyers flood the market. They will experience very low new-supply from developers and, combined with a general housing shortage, prices are expected to return to a steady upward trend in the second half of 2009.

Buy-to-let market remains firm…

Experienced buy-to-let investors are in a strong position to weather the current storm and to benefit from the increase in demand for rented accommodation. The current negativity has resulted in a significant fall in the number of first-time buyers entering the market over recent months, with many expected to stay away over the short term. As a result, strong rental demand is set to continue, providing good news for landlords.

Stuart Law, Chief Executive of Assetz, comments:

“We are in a period of weakness, not a crash, and vendors are more easily negotiated with, provided they are a forced seller. I would recommend that investors take advantage of the current market and continue adding to their portfolio by buying from motivated sellers.

“Recent research has suggested that new home starts will fall to dangerously low levels this year – with only 110,000 new homes expected to be built by the end of 2008, less that half of those cited by Gordon Brown (240,000) as necessary to meet demand, followed by 80,000 or less homes expected to be built in 2009. As a result, house prices will rise again through raw supply and demand imbalance, with rents rising extremely strongly in the short term and firmly for many years to come.

“Overall, demand is clearly greater than supply in the UK and house prices will continue onwards and upwards over the years to come following the recovery from the credit-crunch and more readily available mortgages. Later this year I would still expect to see strength in house price indices as a whole. In the short term this will be helped by developers cancelling the majority of their schemes going forward, reducing an already limited supply and supporting prices. In addition, first time buyers will re-enter the market as mortgages improve slightly.

“I am frequently being told by both estate agents and developers that there is a great deal of pent-up demand in the market from first-time buyers, restricted by the current, limited mortgage availability and higher deposit requirements. Demand has not gone away, buyers still want to purchase a home, but they are waiting for improved deposit requirements.

“The Bank of England made a very dangerous decision in June, judging the recent spike in inflation as more important than the weakening economy and delaying a much needed cut in interest rates. With mortgage lending down 48% since the same time last year, the property market is at serious risk of continuing to stagnate or even falling to a modest degree if action isn’t taken. I would urge the Bank to lower base rates by 0.5% next month.”