The latest UK house price index continues to show an easing in the rate of house price inflation. In the year to January 2019 the average UK house price rose by 1.7 per cent, the lowest rate since June 2013 when it was 1.5 per cent. This is significantly below the recent peak in house price inflation when in May 2016 house prices were growing at 8.2 per cent year-on-year. In this blog we consider how recent patterns in UK house prices compare with those over the past 50 years and also how the growth of house prices compares to that in consumer prices.
The UK and its nations
The average UK house price in January 2019 was £228,000. As Chart 1 shows, this masks considerable differences across the UK. In England the average price was £245,000 (an annual increase of 1.5 per cent), while in Scotland it was £149,000 (an increase of 1.3 per cent), Wales £160,000 (an increase of 4.6 per cent) and £137,000 in Northern Ireland (an increase of 5.5 per cent). (Click here to download a PowerPoint copy of the chart.)
Within England there too are considerable differences in house prices, with London massively distorting the English average. In January 2019 the average house price in inner London was recorded at £568,000, a fall of 1.9 per cent on January 2018. In Outer London the average price was £426,000, a fall of 0.2 per cent. Across London as a whole the average price was £472,000, a fall of 1.6 per cent. House prices were lowest in the North East at £125,000, having experienced an annual increase of 0.9 per cent.
The Midlands can be used as a reference point for English house prices outside of the capital. In January 2019 the average house price in the West Midlands was £195,000 while in the East Midlands it was £193,000. While the annual rate of house price inflation in London is now negative, the annual rate of increase in the Midlands was the highest in England. In the West Midlands the annual increase was 4 per cent while in the East Midlands it was 4.4 per cent. These rates of increase are currently on par with those across Wales.
Long-term UK house price trends
Chart 2 shows the average house price for the UK since 1969 alongside the annual rate of house price inflation, i.e. the annual percentage change in the level of house prices. The average UK house price in January 1969 was £3,750. By January 2019, as we have seen, it had risen to around £228,000. This is an increase of nearly 6,000 per cent. Over this period, the average annual rate of house price inflation was 9 per cent. However, if we measure it to the end of 2007 it was 11 per cent. (Click here to download a PowerPoint copy of the chart.)
The significant effect of the financial crisis on UK house prices is evident from Charts 1 and 2. In February 2009 house prices nationally were 16 per cent lower than a year earlier. Furthermore, it was not until August 2014 that the average UK house rose above the level of September 2007. Indeed, some parts of the UK, such as Northern Ireland and the North East of England, remain below their pre-financial crisis level even today.
Nominal and real UK house prices
But how do house price patterns compare to those in consumer prices? In other words, what has happened to inflation-adjusted or real house prices? One index of general prices is the Retail Prices Index (RPI). This index measures the cost of a representative basket of consumer goods and services. Since January 1969 the RPI has increased by nearly 1,600 per cent. While substantial in its own right, it does mean that house prices have increased considerably more rapidly than consumer prices.
If we eliminate the increase in consumer prices from the actual (nominal) house price figures what is left is the increase in house prices relative to consumer prices. To do this we estimate house prices as if consumer prices had remained at their January 1987 level. This creates a series of average UK house prices at constant January 1987 consumer prices.
Chart 3 shows the average nominal and real UK house price since 1969. It shows that in real terms the average UK house price increased by around 266 per cent between January 1969 and January 2019. Therefore, the average real UK house price was 3.7 times more expensive in 2019 compared with 1969. This is important because it means that general price inflation cannot explain all the long-term growth seen in average house prices. (Click here to download a PowerPoint copy of the chart.)
Real UK house price cycles
Chart 4 shows that annual rates of nominal and real house price inflation. As we saw earlier, the average nominal house price inflation rate since 1969 has been 9 per cent. The average real rate of increase in house prices has been 3.1 per cent per annum. In other words, house prices have on average each each year increased by the annual rate of RPI inflation plus 3.1 percentage points. (Click here to download a PowerPoint copy of the chart.)
Chart 4 shows how, in addition to the long-term relative increase in house prices, there are also cycles in the relative price of houses. This is evidence of a volatility in house prices that cannot be explained by general prices. This volatility reflects frequent imbalances between the demand and supply of housing, i.e. between instructions to buy and sell property. Increasing levels of housing demand (instructions to buy) relative to housing supply (instructions to supply) will put upward pressure on house prices and vice versa.
In January 2019 the annual real house price inflation across the UK was -0.9 per cent. While the rate was slightly lower in Scotland at -1.2 per cent, the biggest drag on UK house price inflation was the London market where the real house price inflation rate was -4.0 per cent. In contrast, January saw annual real house price inflation rates of 2 per cent in Wales, 2.3 per cent in Northern Ireland and 1.8 per cent in the East Midlands.
Inflation-adjusted inflation rates in London have been negative consistently since June 2017. From their July 2016 peak, following the result of the referendum on UK membership of the EU, to January 2019 inflation-adjusted house prices fell by 7.6 per cent. This reflects, in part, the fact that the London housing market, like that of other European capitals, is a more international market than other parts of the country. Therefore, the current patterns in UK house prices are rather distinctive in that the easing is being led by London and southern England.
- What is meant by the annual rate of house price inflation?
- How is a rise in the rate of house price inflation different from a rise in the level of house prices?
- What factors are likely to determine housing demand (instructions to buy)?
- What factors are likely to affect housing supply (instructions to sell)?
- Explain the difference between nominal and real house prices.
- What does a decrease in real house prices mean? Can this occur even if actual house prices have risen?
- How might we explain the recent differences between house price inflation rates in London relative to other parts of the UK, like the Midlands and Wales?
- Why were house prices so affected by the financial crisis?
- Assume that you asked to measure the affordability of housing. What data might you collect?
There is no bigger purchase than a house. Ask most individuals who have at some point in their life purchased a house and they will tell you about the considerable time they devoted to making the decision to purchase. It’s not like rushing to a supermarket and purchasing a kilo of sugar. The decision to purchase a property is not taken lightly: the mood music has to be right. Consumer confidence is therefore an important ingredient for an active housing market. The latest mortgage approval data from the Bank of England suggest the music is not right!
April’s mortgage approval numbers continue to demonstrate the on-going fragility of the UK housing market and, in turn, of British households. April saw 45,166 mortgages approved for house purchase. What makes this figure particularly noteworthy is that it is the lowest level recorded in the month of April since the Bank of England figures started back in 1993. It is also 9% lower than April 2010. Some commentators have argued that the number of public holidays in April contributed to the fall in activity. But, 138,756 approvals over the period from February to April was 4.3% lower than over the corresponding period last year. This would suggest that we can’t lay the blame for low levels of mortgage approvals solely on hot cross buns and Kate Middleton!
The weakness in mortgage approvals data has been regular news for some time. Over the past two years the number of approvals per month has been close to 50K compared to about 89K over the past ten years. What makes the latest figures troubling is that there is no indication of recovery any time soon. Rather, the figures show that housing demand may be weakening yet again. If we exclude December’s low of 42,772, when housing market activity was hit by the harsh winter conditions, April’s figure is the lowest since March 2009.
The weakness in the demand for housing can in large part be attributed to the poor mood music: economic growth remains fragile, average real incomes have been declining and unemployment levels are expected to rise over the coming months. Furthermore, households are naturally reluctant to purchase property is they think house prices may fall further. All in all, we can expect the weakness in housing demand to persist for some time. The question seems to be one of just how weak housing demand will be. The next few months promise to be very interesting to say the least. Keep listening to the music!
UK mortgage approvals hit record low in April Telegraph, Emma Rowley and Harry Wilson (2/6/11)
Mortgage approvals fall to record April low Guardian, Mark King (1/6/11)
Mortgage approvals fall to two-year low Financial Times, Norma Cohen (1/6/11)
Mortgage approvals hit new low, Bank of England reports BBC News (1/6/11)
UK mortgage approvals drop to lowest in four months on lower confidence Bloomberg, Scott Hamilton (1/6/11) )
Pound drops on weak UK manufacturing PMI and mortgage approvals data RTT News (6/1/11)
Mortgage approval numbers and other lending data are available from the Bank of England’s statistics publication, Monetary and Financial Statistics (Bankstats) (See Table A5.4.)
- How sensitive do you think mortgage approval numbers are likely to be both current and future economic conditions?
- Are there any other types of purchases which households make which you might expect to be especially sensitive to economic conditions?
- Is it just the weakness in the demand for housing which explains the current low levels of mortgage approvals? Explain your answer
- Do weak mortgage approval numbers mean that we should expect house prices to fall in the months ahead? Use demand and supply diagrams to help explain your answer.
The latest mortgage approval numbers from the Bank of England are another demonstration of the fragility of the UK housing market. March 2011 saw 47,577 mortgages approved for house purchase. This is roughly in line with levels seen since the turn of the year and, more generally, over the past year. In other words, activity in the housing market might be described as ‘flat-lining’.
Over the past year, the number of monthly mortgage approvals for house purchase has averaged 47,355. This number is almost half the 10-year monthly average of 89,258. There is little momentum in either direction in the number of mortgage approvals. Given the negative influences on both the supply of credit and on households’ demand for credit, it would be a major surprise if the monthly average for mortgage approvals was to rise much above the ‘50k-mark’ any time soon.
But, why the subdued mortgage data? Well, on the supply-side, mortgage lenders are maintaining tight lending criteria. On the demand side, households remain understandably cautious. Unless circumstances dictate a need to move, households are unlikely to be rushing in any great numbers to their local estate agent.
In conclusion, it appears that the current weak activity levels have become the new norm for the UK housing market post-credit crunch. Furthermore, the current flat-lining is likely to persist.
Mortgage approvals highest in five months Financial Times, Norma Cohen (4/5/11)
UK March mortgage approvals slightly lower than forecast Reuters (4/5/11)
Mortgage lending plummets by 60% Belfast Telegraph (5/5/11)
UK mortgage approvals little changed in March, BOE says Bloomberg, Jennifer Ryan (4/5/11)
Rise in mortgage approvals does not indicate recovery, say economists Guardian, Jill Insley (27/4/11) )
Mortgage lending from UK banks still subdued BBC News (27/4/11)
Mortgage approval numbers and other lending data are available from the Bank of England’s statistics publication, Monetary and Financial Statistics (Bankstats) (See Table A5.4.)
- Why do you think housing market activity might be ‘flat-lining’?
- Compile a list those variables that you think affect the demand for mortgages. Which of these do you think are particularly important at the moment?
- Compile a list of those variables that you think affect the supply of mortgages by lenders. Which of these do you think are particularly important at the moment?
- If you were advising an estate agent about future activity levels in the housing market, what would you be telling them?
- What do recent mortgage approvals numbers imply for the strength of housing demand?
This week has seen the publications of two sets of forecasts on the UK housing market in 2011. The first of these came from Rightmove. It is forecasting that house prices next year could fall by as much as 5%. The extent of the fall though is argued to dependent, in part, on any rise in the Bank of England’s base rate and the number of properties taken into possession by lenders. These two factors are, of course, linked because higher debt-servicing costs can contribute to repossessions as the affordability of mortgages decrease. An increase in what are termed ‘forced sales’ will add to Rightmove’s general expectation of over-supply of property.
Righmove are expecting considerable local variations in house prices as a result of local demand and supply conditions. This makes forecasting a national average house price change extraordinarily difficult. It argues that the extent to which potential buyers are credit-constrained or to which demand is ‘credit crunch resistant’ varies across the country. This coupled with variations in the amount of supply to local markets will contribute to considerable differences in house price movements with house prices being ‘underpinned’ in some markets.
Rightmove is expecting the number of properties coming on to the housing market in 2011 to be around 1.2 million, 10% lower than in 2010. However, it is expecting only around 600,000 transactions which is close to half the historic average.
The second set of housing market forecasts this week was published by the Council of Mortgage Lenders (CML). The CML is forecasting that low interest rates will help to underpin current house price values with ‘flat or modestly falling house prices’. They argue that that while recent house price weakness will persist they ‘do not foresee any sharp fall in prices’. The CML are not expecting large numbers of buyers to hold off from looking to buy, but acknowledge there is uncertainty about the availability and cost of mortgage funding.
One contributing factor to the uncertainty surrounding the quantity and price of mortgages is the end to the Bank of England’s Special Liquidity Scheme (SLS). The SLS allowed banks to swap for a period of up to 3 years financial assets, such as mortgage-backed securities (a security representing a claim on the cash flows from mortgage loans), for UK Treasury Bills (short-term government debt). The scheme was designed to provide the banking system with liquidity. The last swaps will expire in January 2012. The CML reports that currently about £130 billion needs to be repaid by banks. More generally, of course, financial institutions are likely in 2011 to continue repairing and rebalancing their balance sheets and this is likely to impact on their lending decisions.
We noted how the Rightmove house price forecast for 2011 was partly dependent on those forced sales arising from repossessions. The CML is expecting what it terms a ‘modest increase’ in the number of possessions from around 36,000 this year to 40,000 next year. The CML though expects the number of transactions in 2011 to be a little higher than Rightmove, albeit still historically low at around 860,000.
All in all, activity levels in the housing and mortgage markets in 2011 are expected to be relatively subdued. This coupled with the expectation that house prices will be lower in 2011 suggests a very sober outlook indeed for the UK housing market. Happy New Year!
Lenders forecast flat house prices Financial Times, Norma Cohen (14/12/10)
UK mortgage lending to fall to 30-year low Telegraph, Steven Swinford (15/12/10)
Repossessions to rise in 2011, lenders forecast BBC News (15/12/10)
Market freeze: Homes sold once in 20 years Sky News, Hazel Baker (15/12/10)
U.K. mortgage lending may decline by a third in 2011 as weakness persists Bloomberg, Scott Hamilton (15/12/10)
House prices fall faster as estate agent predicts worse to come Telegraph, Ian Cowie (13/12/10)
Home sellers warned to drop asking price by 5% if they want to find a buyer Daily Mail, Becky Barrow (13/12/10)
U.K. home sellers may cut prices by as much as 5% in 2011 after December drop Bloomberg, Scott Hamilton (13/12/10)
Housing market forecasts
Rightmove’s housing market forecasts can be found within the December 2010 edition of its House Price Index
Rightmove December 2010 House Price Index (13/12/10)
CML publishes 2011 market forecasts CML News and Views, Issue 24 (15/12/10)
- Compare and contrast the Rightmove and CML house price forecasts for 2011. How similar are the stories underpinning their forecasts?
- What do you understand by forced sales? Using a demand-supply diagram explore how an increase in properties taken into possession could impact on house prices in 2011.
- What do you think affordability means in the context of housing? How might we measure this?
- What factors do you think might impact on the price and availability of mortgage finance in 2011?
- What do you understand to be the purpose of the Bank of England’s Special Liquidity Scheme. Using a demand-supply diagram explore how the termination of the scheme early in 2012 could impact on house prices in 2011.
- What do you think Rightmove means by ‘credit crunch resistant’ housing demand?
- Can demand-supply analysis help to explain how house prices pressure could vary from one area to another? Explain your answer using appropriate diagrams.
House prices are in the news again, but that should come as no surprise because they are such a favourite topic of the British! Three different organisations – the Halifax Bank, the Nationwide Building Society and Rightmove – have all reported that house prices fell in November. The Halifax reported a 0.1% fall, the Nationwide a 0.3% fall and Rightmove a 3.2% fall. The Halifax and Nationwide base their figures on house price information supplied by prospective mortgage applicants while Rightmove report the average asking price of those putting their property on to the market. We should not worry too much about the variations in the magnitude of the reported price falls because the downward trend in house prices is now pretty well established. The Halifax, for instance, has reported five monthly falls since April and they estimate that the average house price over the three months to November is 0.7% lower than a year ago. While the other two organisations are still reporting annual house price inflation rates in positive territory, these rates too are edging closer and closer to negative territory.
The recent falls in house prices come after a rebound in prices in the second half of 2009 which carried on into the early months of this year. The Nationwide had annual house price inflation rates peaking in the spring at around the 10% mark. This appears to have reflected an increase in housing demand and can be seen in the Bank of England mortgage approval numbers for house purchase which recovered from as low as 26,702 in November 2008 to 59,215 in November 2009. By April, Rightmove was reporting that property supply was beginning to outstrip demand and in their May report they noted that suppliers were coming on to the market more quickly than at any time since June 2008. It is argued that supply increased further through late May and into June when the new coalition government suspended house information packs (HIPs). HIPs were a set of documents, including a property information questionnaire, which a seller needed to provide before a property could be marketed.
Rightmove reported in their November press release that the number of new sellers coming to the market each week between 10 October and 6 November averaged 24,028. This was a fall of 9.1% on the previous 4-week period. But, we need to see this reduction in the context of housing demand and the mortgage approvals numbers again provide clues as to the strength of housing demand. The fall in approvals in October to just 47,185 approvals was the sixth consecutive monthly fall. This number of approvals, as Rightmove note, is about half the monthly number of additional properties coming on to the market. In other words, the flow of properties coming on to the market is contributing to a large stock of properties on the books of estate agents. While some existing suppliers have been taking their property off the market, Rightmove note that the current average number of unsold properties on estate agents’ books is only a little down on the historic high reported a couple of months back. This leaves sellers fighting over a limited number of prospective buyers.
In the short term, the extent of further downward pressure on house prices will depend on extent of the imbalance between demand and supply. If a large number of suppliers begin to remove their property from the market, perhaps on the hope that the market will improve later next year, this would help to address the imbalance. Equally, if first-time buyers were to return to the market in larger numbers then that too would help to alleviate downward pressure on prices. The latter, however, is unlikely given the tight credit conditions which are resulting in potential first-time buyers struggling to find the deposit needed to get on to the property ladder. It seems that while many wannabe buyers of property may have a willingness to purchase, their ability to purchase continues to be frustrated by their inability to find the necessary deposit.
House prices slip further in November Financial Times, Norma Cohen (9/12/10)
Bonus for first-time buyers as house prices plummet for the third month in a row Daily Mail (9/12/10)
House prices drop fort he third month, has the bubble burst? London Daily News (9/12/10)
House prices fall 0.1% but hopes rise Independent, Peter Cripps (9/12/10)
House prices drop amid mortgage ‘deep freeze’ Telegraph, Myra Butterworth (9/12/10)
Mortgage approval numbers are available from the Bank of England’s statistics publication, Monetary and Financial Statistics (Bankstats) (See Table A5.4.)
Halifax House Price Index Halifax (part of the Lloyds Banking Group)
Nationwide House Price Index Nationwide Building Society
Rightmove House Price Index Rightmove
Live Tables on Housing Market and House Prices Department of Communities and Local Government
- Tracking house prices is like following a roller-coaster ride! See if you can re-tell the story of UK house prices over the past year using demand and supply diagrams.
- Why do you think UK house prices are so volatile? Can you point to any other market where prices are so volatile? If so, do they share any common features?
- How important are first-time buyers in affecting house prices? What factors do you think affect the number of prospective first-time buyers deciding to enter the housing market?
- Using a demand and supply diagram illustrate the effect on house prices of: (i) a tightening of financial institutions’ lending criteria; (ii) the expectation of forthcoming house price falls; and (iii) increasing economic confidence .
- Although UK house prices are volatile they do increase over the longer-term and by more than the average price of consumer goods and services. What might explain this?
- What do we mean by a demand-supply imbalance? Would you expect this imbalance to continue?
- The average house price is currently falling. But, different housing markets will have their own price patterns. What might explain any differences in house price patterns across different housing markets?