Rebounding consumer confidence, a backlog of pent-up demand, government support, falling unemployment, still low interest rates, limited house building - the economic stars seem to have aligned for the UK housing market.
Forecasts unveiled by property analysts in recent weeks have been universally bullish. Jones Lang LaSalle expects the "first year of confident recovery" in 2014, with average house price growth of 5 per cent. More tellingly, even the usually bearish consultants at Capital Economics, who have no incentive to talk up the market, are forecasting growth of 5 per cent.
And these numbers look cautious in light of the latest statistics. The Halifax index showed a 7.7 per cent year-on-year increase in November, while Nationwide put the growth rate at 6.5 per cent. Based on the lenders' mortgage books, these measures should be taken with a good dose of salt. The two indices based on actual transaction data are showing more modest growth - 3.1 per cent for the Land Registry index and 4.3 per cent for LSL Acadametrics in October, the latest month available. But transaction data is three months behind the market, so the divergence may simply reflect a time lag.
More buyers, limited stock
Whatever the truth, the market is indisputably spinning faster than it was a year ago. Transaction volumes have risen consistently since May, not just in London but in every part of the country. About 95,000 deals were struck in October – 24 per cent higher than in the same month of 2012 (see chart 1).
On the market's coal-face, estate agents report that prices are being pushed up by an increasing number of buyers competing for very limited stock. This supply blockage shows no sign of changing. Housing starts in England are now rising - in the third quarter they were 22 per cent higher than a year earlier after three quarters of solid growth. But they remain about a good quarter below the 2005-07 average and little more than half the 60,000 quarterly level usually cited as necessary to resolve the country’s housing shortage.
So what could go wrong? The most obvious long-term worry is tightening monetary policy. Shares in housebuilders took a knock on 28 November, when the Bank of England announced that mortgages would no longer qualify for its Funding for Lending scheme (FfL). Introduced in the summer of 2012, FfL offers banks cheap money in exchange for certain kinds of lending. Its impact on mortgage costs, particularly at higher loan-to-values, has been dramatic (see chart 2).
But the market may have overreacted. None of the lenders came close to drawing down the sums to which the scheme entitled them in the third quarter, suggesting that FfL was no longer necessary. Risk appetite and other forms of government intervention - notably the Help to Buy policy launched in March - have already taken over. Thawing competition between banks seems likely to keep mortgages affordable as long as interest rates remain low. Given an inflation rate of just 2.2 per cent in October, there is no immediate pressure on the Monetary Policy Committee to raise rates.
Weak wage growth may also keep a lid on house price inflation. The current rush in transactions is being driven by family-funded first-time buyers and buy-to-let landlords, according to the Council of Mortgage Lenders (see chart 3). Mortgaged movers, who were the driving force of the Blair-era boom, are only expected to buy 325,000 houses this year - barely up from the 2009 trough of 315,000. That suggests the market is reacting to a temporary unwinding of pent-up demand by more affluent buyers who have been waiting on the sidelines of a stagnant market. A broader recovery may require a pick up in households’ real disposable income.
Releasing equity
Landlords may be wondering whether their most reliable tenants will be lured into owner-occupation next year, causing costly voids. There is no precedent for a recovery in the housing market that does not sap the private-rented sector. But Grenville Turner, chief executive of Countrywide, reckons that’s because the private-rented sector was immature in the mid-1990s. "This is probably the first time we've seen a recovery in the sales market and continuing growth in the rental market," he says. He even expects growth in an older generation of renters. "We're now seeing the 50-plus age group enter the rental market. They're feeling more mobile and they’re releasing the equity in their homes to live on," he explains.
If this little-noticed trend gathers pace among baby-boomers, it might, in time, precipitate a correction in home values. As Mr Turner points out, "lots of people are living in houses they could no longer afford to buy". If housing equity is consumed rather than passed on through the generations, home values may have to fall within easier reach of incomes.
But by far the bigger long-term threat to house prices remains any increase in interest rates back to levels that would once have been considered 'normal'. Most brokers are forecasting a dip in transaction volumes and house price growth in 2017, when Help to Buy expires and inflationary pressures in the economy may force the Bank to increase interest rates. Such exercises in futurology are useful but inherently speculative. If the 2008 crisis - and this year’s recovery - have taught investors one thing, it’s that circumstances can change very rapidly. For now, property owners should lock in cheap debt while they can, enjoy the benign conditions immediately ahead - and remain alert to economic and political change.
