How will the stand-off in the UK property market be resolved?

The housing market slowdown continues.

According to the latest RICS survey, activity in the housing market has now been cooling off for 12 months in a row.

Fewer people are registering as buyers. Fewer homeowners are trying to sell their properties.

We’ve been here in the past. The question now is: which way does the market go?

The housing market slowdown is rippling out from London

Every month, the Royal Institution of Chartered Surveyors (RICS) asks its members for the views on the housing market.

Obviously, in some ways, surveys are not as scientific as looking at house price data. On the other hand, these people are as close as you can get to the coal face. They can gauge the “feel” of the market and give you a better idea as to whether it’s heating up or cooling down.

They’ll always come at it from a somewhat self-interested perspective, but then you can say that for any industry body.

Anyway, in the latest report, which covers March, the short version is that things don’t look particularly promising for anyone who wants to sell their house for lots of money. On the other hand, that, presumably, is good news for anyone in the market for a house.

As ever, there’s a fair old gap when you look at the regional level. In London, where the market has been tough for a long time now, far more surveyors reported house prices as falling rather than rising. The same goes for most of the south of England, and also for the north east. However, prices are still rising in Northern Ireland, Wales and the East Midlands, for example.

As for the future, most surveyors expect prices to be higher in a year’s time, except in London, where the majority still expect prices to be lower a year hence than they are today.

The house price hopefuls might want to believe that the rest of the UK has it right, and London is just being London. But the rest of the figures suggest that the London slump merely hasn’t yet sunk in elsewhere.  

Buyer enquiries have now been falling for 12 months in a row. They’re Sellers aren’t keen to market their houses in such a grim market, so sales instructions are down heavily. Meanwhile, agreed sales have fallen for the 13th month in a row, with sales down or flat across “virtually all parts of the UK”.   

So what’s going on?

The deep freeze

We’ve talked about the various issues hurting the housing market right now – much higher taxes at the top end, tighter mortgage lending rules, and a general understanding that investing in property might not be a good idea when both left and right wing governments see rental or investment property as a juicy taxable asset.

All of these issues have had a particularly big impact on London, which is where the vast majority of the most expensive properties in the UK are, and which is also a big market for buy-to-let landlords. So if anywhere is going to suffer as a result of higher taxes on expensive properties, and higher taxes on mortgaged buy-to-let portfolios, then London is the obvious candidate.

In short, you don’t need Brexit – or even the threat of Jeremy Corbyn, for that matter – to explain the London slump. You just need to look at the shift in government policy towards rich foreigners and amateur landlords under the George Osborne chancellorship.

However, on top of that, you now have rising interest rates from the Bank of England. One way or another, the rising cost of credit or the perception that credit costs will rise will have an impact on the market. That said, this may be smaller than it would have been in the past simply because mortgage conditions have in general been tightened up.

All of these signs point to much lower house prices. Except that there’s just one problem.

House prices are very “sticky”. As Capital Economics points out, “buyers and sellers are currently locked in a stand-off”. As a buyer, you can be forgiven for being wary right now. Higher interest rates, relatively flat wages, hostile politicians – it’s not a promising market.

But sellers also don’t want to accept lower prices. They have a value for their home in mind, and they’re not going to budge. And while you can argue that this is stubborn and unrealistic, the truth is that most people don’t “need” to sell their home.

The main driver of the house price crash of the 1990s was the fact that soaring interest rates created a lot of forced sellers. In the absence of that sort of event, a house price crash is unlikely to come about. Instead you get a freeze of the sort we’re seeing now.

If this goes on for long enough, then it might lead to the ideal solution -–which is for house prices to be flat or every so slightly rising in nominal terms, while wage growth outstrips them. In other words, you erode away mortgage debt, houses become more affordable in “real” (after-inflation) terms, and everyone is, if not happy, then not distraught either.   

Of course, this “happy medium” outcome is vulnerable on lots of levels. Interest rates could spike. I don’t really see it as a central scenario, but it’s possible. A political upset – a clumsy wealth tax for example – could also hammer house prices. So don’t take it for granted. But so far, the deep freeze and gradual thaw seems the most likely outcome.

It is bad news, however, for companies that rely on a decent level of housing transactions to keep business moving along. If people aren’t moving house, then turnover of items such as new carpets, new curtains, new bathrooms, new kitchens – that falls. The fact that Carpetright is having to shut down a quarter of its branches, for example, is not purely down to competition from the internet.  

That said, if people aren’t spending money on home furnishings, they’ll be spending it on something else. So the impact is sectoral, rather than economy-wide.

In short, don’t expect soaring property prices any time soon. But hoping for a crash might be wishful thinking too.