The short answer is: not soon. The market has been in its biggest slump since the 1990s and, five years in, prices are still about 10 per cent below their peak in nominal terms (25 per cent if we take inflation into account). In the 1990s it took nine and a half years for prices to recover to pre-recession levels. It may not take quite so long this time, but it might.
House prices began to rise towards the end of last year and have continued to do so in 2013. They would need to rise at an average of 4 per cent a year from now to recover more quickly than in the 1990s. That is not unachievable – prices rose 6 per cent in 2010 – but it is not a certainty, especially given the fragile state of the economy.
House prices do not tell the whole story and on their own are not a signal of a healthy market. Rather they can be symptomatic of distortions such as a lack of supply. The level of market activity conveys much more information about the true state of the underlying market. Comparing this cycle with the 1990s, the collapse in transactions this time was much more severe and has hardly recovered since the crash.
Total housing market transactions in 2012 were 43 per cent lower than in 2007, according to the latest data from HM Revenue & Customs. Interestingly, transactions in higher price brackets have been much more resilient. Activity in property priced between £500,000 and £2m was about 30 per cent lower while those costing more than £2m were just 18 per cent lower.
This split between activity in the mainstream and the higher-priced sector of the market tells us a lot about what has held things back, and also where it might go in future. First, the lack of finance has been a bigger hindrance to the mainstream sectors of the market. Those active in the higher price brackets have more equity to play with, despite house price falls.
Ignoring the distortion caused by the first-time buyer stamp duty holiday, transactions have been on a gentle upward path since last summerSecond, those in the prime sectors of the market have higher levels of wealth and will have been less affected by the economy’s poor performance. Even though they have been hit proportionately harder by tax measures, the wealthiest are still less constrained by austerity.
Furthermore, a significant proportion of buyers in the prime central London markets have come from overseas, attracted toLondon as a safe haven for investment, and that is likely to continue. Data shows that interest from overseas is up by a third on last year, even before news on weakening economic conditions in China and a resurgence of issues with eurozone government debt.
The improvement in mortgage credit conditions since the Funding for Lending scheme was launched in July 2012 have allowed mainstream market activity to revive. Ignoring the distortion caused by the first-time buyer stamp duty holiday, transactions have been on a gentle upward path since last summer and reached their highest level for five years in May 2013.
Despite the fact that lenders made less use of the scheme in quarter one 2013 (just one-third of the amount was drawn down compared with the previous quarter), lending has continued – and at good rates. Two-year fixed-rate mortgage loan rates fell to 4.67 per cent in May 2013 from 6.07 per cent a year earlier, while mortgage approvals for house purchases reached their highest level since December 2009 and total mortgage lending continued to rise.
Looking ahead, there is cause for optimism. The Bank of England’s credit conditions survey showed that lenders were growing in confidence about market conditions and seemed willing to continue to lend at higher loan-to-value ratios. Improved expectations about future market conditions have also affected both lenders’ and borrowers’ attitudes to risk. So, providing finance continues to flow once the Funding for Lending scheme finishes, the market should be able to return to health. But there are still some big hurdles.
Affordability remains stretched and this is not made any better by the slow pace of new housing supply. The total number of plots under construction in May 2013 was actually lower than in May 2012 and, looking more closely at the pipeline data, there are more than 26,000 plots which have not progressed at all in the past 12 months.
To put that in context, that is a similar number to the volume of starts in quarter one 2013. The big pipeline also helps to explain why the number of completions in the first quarter of the year was the lowest since quarter four 2010. Without new supply the pressure on prices will continue and will bear down on a recovery in activity.
More important though is the performance of the economy. Even though the Bank and the International Monetary Fund have improved their forecasts for UK economic growth, it is still expected to be well below its trend. Fiscal austerity for the next five years, and the effect of falling real incomes in the previous five, will continue to weigh on household finances and limit numbers of ‘discretionary’ house moves.
One of the big differences is the importance of the rental market. Affordability and a lack of liquidity in the owner-occupied market may have initially helped this market to grow, but improvements in the quality of the stock and a changed attitude to the tenure means that it is likely to remain an important feature of the UK housing market. The private sector rental market now account for 18 per cent of all tenures, compared with just 14 per cent in 2007, an increase of about 1.3m properties.
So are we nearly there yet? Not quite, but we are on our way and are going in the right direction. But when we do arrive the housing market will look very different to what we became used to before the crash. That is not just because of different attitudes to risk and regulation in the banking sector, it is also due to affordability pressures and changing attitudes to tenure which affect our expectations of the housing market.
Fionnuala Earley is residential research director of Hamptons International
Key Points
House prices began to rise towards the end of last year and have continued to do so in 2013
On their own rising prices are not a signal of a healthy market.
Improvements in the quality of the stock and a changed attitude to the tenure means that renting is likely to remain an important feature
