What is the state of the UK housing market? And where is it going?

30th July 2012

Last week gave us disappointing Gross Domestic Product growth figures for the UK where economic output was estimated to have fallen by 0.7% in the second quarter of 2012. Should such a fall be confirmed by subsequent updates then we are in a position whereby the UK housing market will be likely to feel something of a chill. And as I shall demonstrate below it has been in a position where income growth has not supported the growth in house prices for a while.

Incomes versus house prices

Hometrack did some research on the level of income growth in the UK and if we look back we see this.

Over the whole period 1949-2012 UK GDP growth has averaged 2.3% compared to 2.6% for real household income growth……… However, if you look at GDP and real household income growth since 2000 this has shown average growth of between 1.5% and 1.7%. much lower than the long term average.

We see here the impact of the negative real income growth of the last few years which have dragged down the average used for the period since 2000. This looks ominous for the UK housing market going forwards as a squeeze on real incomes is likely to lead to a squeeze on house price affordability. However we also know that the recent fallback in the rate of official UK inflation has reduced the rate of fall of UK real incomes. What we do not know is whether the fall in economic growth will reduce income growth further. However we do know that actual income growth is already quite low as we see below.

Total pay (including bonuses) rose by 1.5 per cent on a year earlier

One thing we can be sure of is that there is no support for any recovery in house prices from these numbers.

The latest numbers from Hometrack

House prices have fallen for the first time in seven months declining by -0.1% over July

And the forecast for future prices was not especially optimistic either.

The gap between supply and demand (see figure 2) is set to widen over the summer months and points to further modest price falls through the summer and autumn.

Interestingly even London only just managed to get its nose into positive territory this month as it registered only a 0.1% rise. This does not mean that the central London property bubble is over merely that outer London is starting to offset it. By contrast the weakest area was the North East where prices fell on average by 0.5% in July.

Mortgage Lending is falling too

Last week I reviewed the numbers from the British Bankers Association for mortgages and today we have received data from the Bank of England on this subject which adds in building societies and other non-bank lenders.

Continue Reading…

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