Uncertainties in the UK Housing Market

UK House prices continue their uncertain stagnation – against a backdrop of a double dip recession, falling real incomes and inflationary pressures. The slump in the housing market could have been more severe (e.g. look at experience of Spain, US and other countries). But, the outlook for the UK housing market has many uncertainties.

UK House prices since 2002

UK house prices have been flat since the end of 2004.

State of the Economy

Given the double dip recession, it is perhaps surprising UK House prices haven’t fallen. We are experiencing the greatest prolonged fall in GDP since the 1930s.

The fall in GDP in the early part of 2012 was attributed to big falls in construction and mining (including oil). Construction fell 3.0% as government capital spending was cut back.

The worrying factor is that the poor growth in UK economic performance cannot be explained away by weakness in the Eurozone. There is an underlying weakness in domestic demand. Some surveys suggest a partial recovery in consumer spending and the service sector, so there is still hope of a recovery later in the year.

Inflationary Pressures remain

The continued inflation is another cloud on the horizon.

Firstly, the above target inflation, means that real prices are doing worse than nominal house prices. With inflation running at 3%, it means stagnant house prices actually represent a 3% decline in real value.

Also, the continued inflation have meant that the inflation ‘hawks’ on the MPC have started talking about the possibility of interest rate rises. This talk of increasing interest rates will fade after news of the double dip recession, but it is a reminder that the housing market is susceptible to when the era of super-low interest rates end.

Uncertainties in the UK Housing Market

• Prices stagnant on low trading volumes
• Banks still trying to improve balance sheets and reluctant to offer wide ranging mortgages
• Housing market helped by ultra low interest rates, but continued inflation raises prospect that rates may have to rise. Significant increases in interest rates may mean many home-owners suddenly find mortgage payments difficult in an era of high unemployment and falling real incomes.
• Fall in home-ownership rates reflects the difficulty first time buyers have in getting onto the property ladder. With house price to income ratios still quite high, it is even more difficult for new buyers to raise first deposit.
• Housing market still highly divided on regional factors. For example, recently borough in London considered moving those on housing benefits to other parts of the country because it couldn’t afford the very high rents in London. In many areas in the South, house prices are prohbitively expensive for many key workers.