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!
Articles
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)
Questions
- 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.