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House prices are unlikely to rise by more than 2% over 2017

September 7th, 2017
Author: Economic Voice Staff

Halifax surprisingly reports house prices spiked 1.1% in August. This lifted the year-on-year increase to 2.6% in three months to August – up from 2.1% in three months to July which had been lowest since April 2013.

The EY ITEM Club says it retain the view that house prices are unlikely to us to rise by more than 2% over 2017. A small rise of around 2% also looks likely in 2018.

While there was a pick-up in mortgage approvals in July, the EY ITEM Club doubts that it marked the start of a significant upturn in housing market activity. Latest survey evidence generally still points to lacklustre activity.

Housing market activity and prices remain under pressure from serious squeeze on consumers, weakened confidence and heightened caution over engaging in major transactions.

The downside for house prices should be limited markedly by the shortage of houses for sale. High employment and very low mortgage rates are also currently supportive.

Houses

Howard Archer, chief economic advisor to the EY ITEM Club comments:

The Halifax reported house prices spiked 1.1% month-on-month in August. House prices had previously increased by an upwardly revised 0.7% in July (previously reported as a rise of 0.4%) after falling 0.9% in June.

Even so, house prices were still up by just 0.1% in the three months to August compared to the three months to May – although this was the first positive three-month/three-month reading since March.

Annual house price inflation on the Halifax measure climbed to 2.6% in August from 2.1% in the three months to July, which had been the lowest rate since the three months to April 2013.

House price measures can be volatile says EY ITEM Club

The Halifax data for August contrasts with the Nationwide reporting that house prices edged down 0.1% in August after a small gain of 0.2% in July. Annual house price inflation on the Nationwide measure slowed to 2.1% in August from 2.9% in July, thereby matching May’s smallest increase since June 2013.

The contrast between the Halifax and Nationwide data for August highlights that house price measures can be volatile and differ from month to month between reporting agencies. It is therefore best not to attach too much importance to one particular survey but to try and take an overview.

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Mortgage activity picked up in July but most evidence points to lacklustre activity

The Bank of England reported that mortgage approvals for house purchases picked up more than expected in July to be at the highest level since March 2016. Specifically, mortgage approvals jumped to 68,689 in July from 65,318 in June and a 7-month low of 65,140 in April. This just surpassed the previous 2017 peak of 68,664 seen in January and was the highest level since March 2016 (70,314 when activity was lifted by purchases to beat Stamp Duty rises for the Buy-to-Let and second home owners sectors). Even so, at 68,689 in July, mortgage approvals are still well below the average monthly level of 81,772 seen during 1993-2017.

While July’s marked pick-up in mortgages may ease some concerns over tepid housing market activity, we have doubts that it marks the start of a significant upturn.

Outlook for house prices

Despite the spike in house prices reported by the Halifax in August and July’s pick-up in mortgage approvals, we retain the view that house prices are unlikely to rise by more than 2% over 2017. A small rise of around 2% also looks likely in 2018.

The fundamentals for house buyers are likely to remain weak over the coming months with consumers’ purchasing power continuing to be squeezed by inflation running higher than earnings growth. In addition, housing market activity may be hampered by weakened consumer confidence and a limited willingness to engage in major transactions. Indeed, GFK reported that consumer confidence in August was only modestly above July’s one-year low, with the major purchase index soft.

Housing market activity and prices are also likely to be pressurised by stretched house prices to earnings ratios and tight checking of prospective mortgage borrowers by lenders. According to the Halifax, the house price to earnings ratio reached 5.80 in December (the highest level since August 2007) and was still as high as 5.71 in August. This is well above the long-term (1983-2017) average of 4.21. Furthermore, mortgage lenders are under pressure from the Bank of England to tighten their lending standards. 

The downside for house prices should be limited markedly by the shortage of houses for sale. High employment and very low mortgage rates are also currently supportive.  The latest RICS survey showed new instructions to sell fell for a 17th month running in July. Consequently, average stock levels on estate agents’ books remained close to record lows.

There is a possibility that potential house buyers may also be concerned by the Bank of England indicating that interest rates could eventually rise more than the markets currently expect, although the likelihood of a near-term hike has seemingly receded. While any increase in interest rates would be small and mortgage rates would still be at historically very low levels, the fact that any interest rate hike would be the first rise since mid-2007 could have a significant effect on housing market psychology by focusing minds on the fact that sooner or later they will have to deal with higher mortgage rates.

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