In this week's blog, we once again return to house prices ahead of the September 20th ONS data that will give the market a better steer on the rate of the retracement and what to expect in Q4 and beyond. We unpack how that will affect confidence in the development market, and to personalise our weekly cogitation, we offer our view on where we think the market will go.
At the point of writing, Britain's largest housebuilder, Barratt, has posted an annual profit fall, citing difficult market conditions and rising mortgage rates continuing to deplete demand; the share price fell 2.4% on the news, in turn pulling down the overall UK housing sector index by a comparable amount, perhaps further indicating the scale of the housing titans market share. There are many varying factors for this, but maybe put best by the CEO when speaking to Reuters, the conditions are a "recipe for the first-time buyer to decide not to purchase." The plethora of headwinds lashing the market can probably be boiled down to the fact that it's proving expensive to make the product, and it's expensive to buy the product, and that's potentially reflected in Barratt's onward sales data standing at 2.44 billion pounds ($3.07 billion) as of Aug. 27, down 36% year-on-year.
So, returning to house prices, the central question, looking at the data, is where the floor will be. Everyone being led by the data is now reasonably confident that the house price retracement will continue, but there is still, in our belief, a strong case for a soft landing; we certainly aren't seeing the full-scale crash triggered by soaring mortgage rates that was widely hypothesised in the broader media. Nationwide, which runs off about 11.8% of the market data in terms of its viewpoint, has painted a reasonably bleak picture, but the ONS data that we will see on Sept. 20 taken from the land registry, still at the time of writing shows the average UK house price was £288,000 in June 2023, which is £5,000 higher than 12 months ago, a steep decline from the peak last year. You could argue for now that’s almost the definition of a soft landing, down from the peak but not falling below a wider multi-year trendline.
Interestingly, Lloyds have changed their sentiment in their latest round of house price predictions, initially with one of the most bearish outlooks at the end of 2022 predicting a 14.8% drop, that's now been watered down to a far more moderate base case of a 5.4% decline, well within the definition of a soft landing given that house prices are up 239% in Greater London since the millennium. Their predictions have significant caveats, one being rising inflation pushing affordability outside of their traditional credit risk models. Still, their overall take on the situation is far more moderate than where we were at the start of the year.
This is where we return to our thesis, touched on previous blogs where we suggest the metrics for measuring the strength of the UK housing market have changed over time. It used to be quite simple: high demand and not enough homes for everyone, prices go up, low demand and plentiful supply, houses drop down; essentially, it was all based around economic growth and income, so looking at unemployment rates and inflation v supply you could get a reasonable handle on what's likely happening in the housing market, the direction of travel. What we can't see in the retail market, and what we hypothesised is making a massive difference in the likelihood of a soft landing, is the mass commodification of the housing market that's taken place over the last two decades.
In London, all-cash buyers are two-thirds of the entire market, with 30% UK-wide being cash buyers. The counterargument to this is the lack of differentiating investors & downsizers; however, primer locations in terms of price and affluence do not necessarily suggest downsizing. Coupling this with over a third of the UK housing market being buy-to-let property, there is such a solid bedrock foundation here the supply may always be in catchup as investor demand has become permanently entrenched over the last two decades.
So, to bring this back around to the all-important question, where do we see house prices going? We are being led by the data here, so we can only give our best guess, but there is nothing yet to confirm it will be anything but a soft landing.
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