RICS survey suggests slowing of housing market

One of the major concerns behind the recent rate rises by the Bank of England has been the continuing rise in house prices. Three quarter point rises between August 2006 and January 2007 did not seem to deter house buyers as house prices continued their upward march. But maybe now the tide has turned, or at least hit the breakwater.

House prices rose for the nineteenth consecutive month, but in May they increased by the least amount for more than a year. The confidence of surveyors in the future prospects for the market has been dramatically reduced. Figures just out from the Royal Institution of Chartered Surveyors (RICS) say that 23.9% more surveyors report house prices rising than falling in the three months to May, whereas the figure was 28.5% in April.

Figures also show that the number of houses for sale went up by its fastest ever recorded rate, 39%, compared with 12% in April. This is assumed to be a result of the planned introduction of Home Information Packs (HIPs) on 1 June, although these have now been delayed until 1 August, and with some relaxation of the rules too.

Confidence of surveyors in the housing market has been knocked by the latest rate rise, and continued speculation that interest rates will rise again, probably to 5.75% in August, and to 6% by the end of the year. With these concerns, the number of surveyors forecasting prices will rise in the next three months has fallen to its lowest level since April 2006, and has now fallen for seven months in a row.

RICS say that given the expectation of higher interest rates and the fear of homeowners for the end of their fixed rate coming soon and the resultant hike in mortgage payments, affordability will be hit hard and the market will cool without question.

Recent reports from Nationwide and Halifax agree with the findings of RICS: the fast house price growth of the last 18 months is finally slowing down.

Underlying demand conditions still appear to be good, as new buyer enquiries leveled out in May despite the interest rate rise. The effect of rate rises on new buyer enquiries has in fact been limited, as RICS says, “the absolute level of demand is still high in light of buoyant economic conditions.”

Not as many sales are coming to completion compared with the properties available – which did rise fast, as previously mentioned – but this does indicate that market conditions have started to loosen, and there is more room for negotiation by buyers. The ratio of sales to stock fell from 43.3 in April to 40.9 in May – the second monthly fall in a row.

Most property experts feel that the property market will deflate gently, and not come down with a crash. High demand in London and surrounding counties is keeping the market there strong, and such growth will decline only slowly as there is still a supply shortage.

Jeremy Leaf of RICS said: “The stabilisation in buyer enquiries sends a clear signal that home buyers are undeterred by recent interest rate rises. However, the full impact of rising rates is yet to be felt and buyers tempted by the recent strength of house price rises may need to exercise caution. With interest rates expected to rise even higher and some home owners fearing the end of fixed-rate deals, affordability conditions are set to worsen across the board and will herald a cooling market. Conditions in the market have loosened as sellers sought to avoid the upfront costs of the recently delayed HIP. However, the surge in supply will be short lived, although owners of four bedroom properties may decide to enter the market before the next deadline on 1 August."

RICS housing market survey has been collecting data since January 1978, making it the longest running monthly survey of house prices in the UK. The survey is cited by the Bank of England’s monetary policy committee at its monthly interest rate setting meetings.

One of the main issues affecting house prices will be affordability, as first-time buyers can’t get onto the property ladder because house prices are out of reach. With the ratio of mortgage interest to income running at its highest level since 1992, and with the amount of money for a deposit being higher than ever, the housing market looks unsustainable. But that’s been said before. A growing trend is for the Banks and Building Societies to offer ‘supersize’ mortgages, of 100% or more of the house price. In a situation where house prices stabilise or even fall, this could lead to another round of negative equity, the like of which has not been seen since the early 90s.

With debt a growing problem in the UK, and recent advice from Mervyn King, Governor of the Bank of England, for people to take care with their finances, taking out further debt does not seem to be the best idea.