Recent UK Housing slowdown BUT signs of rebound going forward…
Housing slowdown? Yes sir.
- The YoY house price gain (Halifax and Nationwide indices averaged) slowed from 10.9% in May 2014 to 8.3% in Jan 2015.
- Mortgage approvals fell 17% YoY in Nov and Dec 2014, and first time buyers (FTB) declined YoY in Nov and Dec 2014.
- Interest rate increase expectations: Fixed mortgage rates rose by up to 20bp in 1H14 due to expectations of MPC base interest rate tightening.
- Regulatory-driven tightened lending: The BoE credit conditions survey indicates mortgage lending standards tightened (around credit-scoring and income verification) following the Mortgage Market Review (MMR) and also due to the FPC’s macro-prudential tightening (limiting high income multiple loan supply).
- Mansion tax concerns: The housing market’s upper price bands have been impacted by fears of a post 2015 election Mansion Tax. This would be felt predominantly in London, which covers a disproportionate c. 80% of transactions above £2mm.
- Inflated London valuations: As per Nationwide’s index, London house prices in 2Q14 increased 8% QoQ and 26% YoY – the highest QoQ gain since 1979 and YoY gain since 1987. The ratio of London house prices to the UK average propelled to record highs of 2.2x. Subsequently, London house price gains in 3Q and 4Q declined to a c.2% average QoQ.
BUT this housing slowdown is forecast to be temporary.
- The market is expected to rebound due to a sharp rise in the balance of people who intend to buy a house in the next 12 months. Going forward, it is expected that the recent housing slowdown will prove temporary, and that housing activity will pick up modestly this year, with the number of approvals rising c.10% and prices rising 5-10%.
- Substantial pent-up demand: FTB numbers rose rose to 312K in 2014, which is the highest since 2007 but still falling short of the the pre-crisis average of 465k p.a. over 1980-2007.
- The aggregate shortfall of 1.6mm FTBs over the last 7 years has resulted in a lowest home ownership rate of the last c.30 years at 2013: 64.6% vs 2007: 73.3%.
- The share of households that own a mortgaged home declined to the lowest rate since 1981 at 2013: 37.4% vs 2007: 46.9%.
- On both these measures, the UK has seen the largest drop in the home ownership rate compared to other EU countries and is below the EU average of 2013: 70.0%.
- There are no indications that there is a reduced desire for home ownership whatsoever. IPSOS/MORI conducted a recent poll that showed 84% of people (68% renters) would like to own their own home. Thus, there is still substantial pent up demand for housing.
- Low mortgage rates: BoE data shows that the 2-year average fixed rate mortgage (75% LTV) is at a record low of 2% in Jan 2015, vs 2.6% in 1H14. There has been an even greater drop in rates on higher LTV loans.
- Credit availability expected to increase: BoE credit conditions survey suggests mortgage lending standards softened in Q4 after a 3Q tightening.
- Government support in the form of ‘Help to Buy’ and Stamp Duty Reforms: The number of HTB purchases from Apr 2013 to Dec 2014 is 41.5K, accounting for 2% of housing transactions. Only 6% of HTB purchases were in London (with zero in the most expensive boroughs; Kensington, Westminster, Richmond, Camden and the City of London). Both Labour and the Conservatives propose to continue this HTB scheme post 2015 election, and the recent Stamp Duty reforms in 4Q14 will help the lower end of the housing market.
- Strong BTL Demand: The number of BTL loans increased 16% YoY in 4Q to the highest level since mid 2008. With low mortgage rates and low average annual void period statistics, there are clear financial incentives for BTL purchases.
- More housing-related macro-prudential tightening unlikely: Loan standards are cautious demonstrated by the percentage of new FTB mortgages being capital repayment increasing to 100% in the last three quarters (vs 2007: 67% and early 1990s: up to 20%). Addiitonally, the share of loans with income verification has risen to 3Q14: 97% vs 2007: 58%.
Overall, the recent housing slowdown is expected to be temporary. A rebound is expected driven by a combination of fixed mortgage rates at record lows, credit availability expected to increase, strong BTL demand, and the lowest home ownership rate indicating pent-up demand.
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