Dennis Turner is chief economist at HSBC
In a number of ways, this calendar year has been a surprising one, and a number of them were pleasant surprises. In particular, Gross Domestic Product – a measure of the goods and services produced in a country in a year – growth will be around 1.8%, a marked improvement on the -5.0% of 2009, and much better than was expected. In addition, unemployment peaked at a lower number than had been widely forecast, high street spending was resilient in the face of considerable provocation from slow earnings growth, above-target inflation and a considerable debt overhang, while business surveys continue to point to growth in the coming months.
Yet, even after four quarters, a sense of uncertainty still pervades the economy, with the risk of activity weakening greater than the opportunities of the recovery accelerating. The impact of chancellor George Osborne’s £120bn fiscal retrenchment is hard to predict, but could take a heavy toll on activity in certain parts of the country. Weak growth in Europe and the US, moreover, raises doubts about the prospects for exports to be the key driver of output, while inflation is the elephant in the room nobody wants to talk about.
Limitations
Having played all their best cards already, there is little the authorities can do if any of these factors push GDP back down. Interest rates can hardly go any lower, and it will be politically difficult to reverse the fiscal tightening. A bit more quantitative easing, on top of the £200bn that has already been pumped in by the Bank of England, is about all the policymakers can do. But there is a growing consensus that, even if growth is fragile, erratic and geographically and industrially patchy, the trend line will be upwards and the likelihood of a double dip is receeding.
Keeping Bank Base Rate at or close to the current 0.5% throughout 2011 is a key element of the recovery strategy. While fiscal policy is being tightened, it is important to ensure that monetary policy supports recovery, and a Bank Rate lower than the rate of inflation – implying the real cost of money is negative – is at the core of this approach.
It is clear that the chancellor’s deficit-reduction timetable will impose huge demands on the private sector to fill the gap. It is an act of faith to claim it will pan out as naturally as he expects. Those who believe the coalition government is cutting too deeply and too quickly, on the other hand, labour under their own illusion. They assume that those who, up until now, have been lending the UK the money it needs will continue to do so at the same benign rates as in the past. As recent events elsewhere in Europe have shown, this also is an act of faith.
Resistance
Strangely, it is housing that has been most resistant to the slow pick up in activity across large parts of the economy. Yet the fundamentals point to a robust recovery. Although the long-term ratio of house prices to incomes suggests further falls in prices are necessary to restore equilibrium, this does not take into account the impact of lower interest rates. With the base rate at a 300-year low, house prices some 20% lower from peak to trough, but incomes for those in employment around the same or even higher, housing affordability is back where it was 10 years ago. And, given the UK’s rate of household formation – over 200,000 a year – together with the fact that not since 2007 have private sector housing starts topped 100,000, everything should point to an increase in house prices.
Instead, prices, which rebounded a little earlier in the year, have now stalled or are edging down, as are the number of mortgage approvals. As a rule of thumb, it is assumed that around 80,000 approvals a month are needed to keep prices stable, and so the current level – in the 40,000s – is a downward pressure on prices.
Issues
There are clearly factors at work in the housing market other than the usual supply-demand issues. Consumer confidence is one obvious issue. Despite the relatively upbeat GDP data, many households face further squeezes on incomes through slow earnings growth and higher taxes, plus a debt overhang. Even though unemployment appears to have stabilised, there is still much uncertainty in the labour market, and if there are 300,000 job reductions in the public sector as the chancellor has forecast, it will further undermine confidence. In these circumstances, it is no surprise that there is an unwillingness to commit to new, longer-term debt.
Meanwhile, mortgage finance is not as freely available as in the period up to 2007. Many institutions expect larger deposits, which delays first-time buyers’ entry into the market. The banks’ caution is based on the view that prices are likely to fall and that interest rates will rise in the coming months, and it is in nobody’s interests to see homeowners struggle with repayments.
All of this, therefore, points to house prices in 2011 staying relatively flat, but as the economy digests the spending cuts and activity gathers a little momentum, builders will prepare for an upturn in demand by increasing starts modestly, up from 97,000 this year to around 110,000 next. Little is expected from the social housing sector, which will be subject to spending constraints. The rental market should therefore be active, particularly in those parts of the country less affected by public sector spending reductions. So, we face another difficult 12-month period, but one of transition as the economy stabilises after the roller coaster ride of the last few years.
Joshua Miller is an economist at the Royal Institution of Chartered Surveyors
A slowing economy is likely to ensure that interest rates will remain on hold for at least the next 12 months. However, the preliminary official estimate of Q3 GDP was surprisingly strong, and while this hasn’t for the time being changed our call on interest rates, it has reduced the odds of a second round of quantitative easing. In terms of house prices, our latest housing market survey suggests that rising new vendor instructions coupled with flagging buyer enquiries are resulting in a more subdued price picture. Falling enquiries reflect greater nervousness on the part of consumers, particularly in the wake of recently-announced public spending cuts and expected job losses. Meanwhile, rising instructions are, for the time being, more related to one-off factors such as the abolition of Home Information Packs in May, which has made it far easier to test the market. Given this supply/demand dynamic, surveyors have become far more negative in their short-term price assessments. However, two factors are likely to exert a stabilising influence on prices, at least over the medium term. Firstly, the severe lack of home building against an existent and significant shortage of property and secondly, the lettings market to which many vendors are likely to switch, thus removing stock from the sales market. The outlook for sales volumes is likely to remain subdued. Not only is demand weakening, but the lack of available mortgage credit, particularly on affordable terms, remains a major barrier for first-time buyers. Worryingly, there is as yet no sign that mortgage lending is about to rebound. Indeed, the Bank of England’s Q3 Credit Conditions Survey points to a continued contraction of mortgage availability during Q4. In summary, I therefore predict a weak economy, rates to remain on hold and a subdued outlook for house prices and sales volumes, but an improved outlook for lettings market activity.
Jennet Siebrits is head of residential research at CB Richard Ellis
It is unlikely that 2011 will be a great year for the housing market, as sentiment is still fragile and uncertainty is rife following the government’s proposed spending cuts. A lack of house price increases has resulted in a renewed weakness in the housing market and subdued activity.We are expecting falls of around 3% next year, with the majority of that decrease coming in the first half of the year. Things will start to improve towards the end of 2011 as fears of a double dip recession recede. However, at the end of the year interest rates will have started on an upward trajectory, which could dampen any upswing.The muted mortgage market is continuing to hinder buyers, and it could worsen if the Financial Services Authority places tighter restrictions on lending. Lenders have claimed that there will be no increase in mortgage lending next year, which is an issue that needs to be resolved swiftly, as it is clearly impacts on affordability and activity levels.Buyers unable to access the home ownership market are increasingly turning to the private-rented sector, which is substantially reducing the supply of stock and consequently putting upward pressure on rents, creating a landlord’s market. We expect the process of structural change that began in the housing market in 2008 to continue through 2011 and beyond. Ultimately, the private-rented sector will continue to grow at the expense of traditional owner occupation.Despite the ongoing uncertainty in the housing market, there are still a number of attractive opportunities for investors. We have identified 13 sites in Greater London that have stalled during construction and a further seven sites in Central London that have planning permission, all of which are on hold because of funding issues. These sites could be a good proposition for investors who want to take advantage of current rental yields via build-to-let
.Martin Ellis is the housing economist at Lloyds Banking Group
An increase in the number of properties available for sale in recent months, together with a decline in demand, has put modest downward pressure on prices. Prices in the three months to October were 1% lower than in the preceding three months. This rate of decline, however, is markedly less than the quarterly declines of between 5% and 6% during the second half of 2008.
We expect interest rates to remain low for some time. This will underpin the favourable affordability position for those able to enter the market and help to minimise the levels of forced selling. The low interest rate environment has reduced the burden of servicing mortgage debt. Typical mortgage payments for new borrowers have fallen from a peak of 48% of average disposable earnings in mid-2007 to 30% now. This key measure of affordability is at a more favourable level than the long-term average of 37% over the past 25 years and is an important factor supporting housing demand.
The economy is expected to continue its recovery, which should help to underpin improving consumer confidence. There are some early signs that the recent downturn in house prices may be deterring people from trying to sell now, which if sustained should also help to support prices.
There are, however, a number of factors that will constrain the market, dampening both house prices and the number of sales. Earnings growth is expected to be very modest over the next year, while tax rises are on the way as the new government grapples with the size of the budget deficit. Significant public sector job losses are expected as a result of the recent Comprehensive Spending Review.
Shift
There has also been a significant shift in mortgage funding sources since 2007, with Bank of England and government schemes filling the gap left by the disappearance of the securitisation market. Replacing this funding will be a key issue for the mortgage lending industry over the next few years. Meanwhile, banks are being required to boost their capital and liquidity reserves, both of which reduce the funds available for lending. These developments are affecting banks’ funding costs and are likely to have implications for mortgage rates. They also suggest that the total amount of mortgage finance available will remain constrained.
Taking all these factors into account, and accepting the greater than usual levels of uncertainty, our forecast is that house prices will remain broadly stable during 2011. The level of transactions is also expected to be largely unchanged compared with this year, therefore remaining low by historical standards.
Looking further ahead, the longer-term imbalance between supply and demand is set to persist as the rate of house building remains low relative to the rate at which new households are being formed. This will underpin house prices over the medium and longer terms. Nonetheless, with the ratio of house prices to earnings still above its long-term average, any price growth is likely to remain weak over the coming few years.
James Thomas is head of residential investment and development at Jones Lang LeSalle
Residential price growth continued to weaken throughout the second half of 2010, with a national forecast of a flat housing market predicted by the end of the year. A two-tier market is also evident, which splits price performance in London from the rest of the UK.
UK prices are up by 1.4% annually, although in light of public spending cuts, prices fell by 1.5% in Q3. And as the brunt of these cuts is phased in, average UK house price growth has been revised down from 0% to -1% in 2011.
In contrast to much of the UK, price growth in London has continued. When measured on a quarterly basis, Greater London rose 1.1% in Q3 and Southern areas of England gained 0.8% while the Midlands and Northern market were flat. We expect this north/south divide to widen next year as public spending cuts and a reduced welfare spend affect take-home pay.
The supply of property for sale has declined for the first time in nine months. Demand remains suppressed across the nation, with the net balance of new vendor instructions falling from +22% in September to -4% in October on RICS’ measure. Meanwhile, new buyer enquiries have fallen from -2% to -12%; the fifth consecutive month of falling demand.
Government policy continues to have a significant bearing on the housing market, with the Comprehensive Spending Review, Localism Bill and National Planning Framework in April 2012 all set to have an impact. Regionally, local authorities will be able to benefit from the government’s New Homes Bonus scheme, designed to stimulate house building at a local level.
Short-term turmoil sees UK price growth estimates revised down, but after new government policy measures are embedded the longer-term outlook for stable price growth is encouraging. National prices are forecast to rise by an average of circa 7% per annum between 2012 and 2014. The regional differential is, however, projected to widen, with strong growth in London above 9% per annum.
Michael Coogan is director general at the Council of Mortgage Lenders
The mortgage market looks more robust now than at the height of the financial crisis, but it is still very subdued by historic standards, and we expect that to continue into 2011.
Lending levels are likely to remain low as lenders continue to be cautious about lending to borrowers perceived to be higher risk due to uncertainty about the direction of the market. It will continue to be difficult to form chains with an absence of first-time buyers, so it is hard to envisage housing transactions rising much above current levels for some time. And with limited ability to refinance for some, and little incentive to remortgage with the base rate at a 300-year low, gross lending will remain poor in 2011.
Next year will also see banks repaying much of the £185bn Special Liquidity Scheme funding by the end of the year, and although it appears that fears about how much money the banks could raise by then have eased, the ongoing tightness in funding market conditions needs to ease significantly for lending levels to increase to anything approaching normality. By normal, we mean annual gross lending approaching between £200bn and £250bn.
We will end 2010 with lower arrears and repossessions than even our revised forecasts suggested, but the scale of the cuts announced in the Comprehensive Spending Review in October will begin to show their effects in 2011. Public sector job cuts will put upward pressure on unemployment and flow into arrears problems for some.
Unprecedented low interest rates have helped borrowers to cope during the recovery from recession, as have increased lender forbearance, government support and funding of debt advice. And despite inflation recently being higher than expected, most experts do not expect rates to rise to any great extent in 2011. The government needs to continue to show support for borrowers, and be prepared to extend current support measures beyond the end of 2011.
