UK Housing Market - What's in Store for 2014?

Publicity is a powerful tool where positive news will engender confidence in numerous areas of the economy, particularly the housing market.  Very few will be willing to buy or sell property in a stagnant or reducing market, however as soon as the message changes to something more positive, we see what we are seeing now, where more properties are put on the market and house prices start to increase

Source: http://www.2mrealty.com

If we take a look back to the beginning of 2013 there were many who were predicting a tough year for the UK economy, with continued slow growth of the housing market, low construction output and in fact concerns about slipping back into a triple dip recession.  The reality however would have surprised even the most optimistic amongst us.  On 20^th December 2013, BBC News Reported: ‘The UK economy is growing faster than previously estimated, according to the latest official figures. The Office for National Statistics (ONS) said gross domestic product was up 0.8% in the July-to-September period compared with the previous quarter, confirming its previous estimate. This means the estimated annual growth rate has now risen from 1.5% to 1.9%, a revision that has surprised economists’. 

Contributing to the unexpected improvement in the economy was an equally surprising upturn in the UK housing market. The Guardian (online) reported on 30^th December 2013:  ‘On average, house prices grew by 4.4% during 2013 as the housing market revival took hold, following a 0.3% drop during 2012. Prices increased by 0.5% month-on-month across England and Wales in December, marking the 11th consecutive month of rises. London and the south-east registered the strongest gains across 2013, with prices lifting by 9.1% and 5% respectively while prices in the north fell by 0.5% over 2013.  75% of postcodes registered price gains over the year, 15% saw prices edge down and 10% were unchanged. This marks a sharp turnaround compared with 2012, when just 20% of postcodes recorded price increases’.

In addition BD Online reported on 30^th December 2013: ‘Growth in house building is at its strongest for 10 years but levels of commercial construction also rose sharply and civil engineering projects also saw sustained growth. Construction firms are growing increasingly positive about the year ahead and the number of firms anticipating a rise in workloads is the highest since September 2009’.

Based on the many ‘good news’ stories similar to those detailed above, it would appear that we are heading in the right direction with the UK moving out of the economic wilderness with a much more rosy and stable future ahead.  BUT………. is this really the case?

Source: http://www.express.co.uk

As an analogy, let us think about the UK economy as a sportsperson who has suffered a severe injury, one that has possibly threatened their career.  A lengthy spell of physiotherapy and rehabilitation is required in order for them to return to full fitness.  If this process is rushed or not undertaken properly, the sportsperson could aggravate the injury and end up back to where they started.  This is also the case for the UK economy.  If we do not manage the pace of the recovery appropriately, we could quite easily end up back in recession. Frozen or low salary increases, increases in the cost of living including ever increasing energy prices, high unemployment, control of inflation, interest rates, reduction in public spending and other austerity measures are some of the factors that need to be addressed as part of any recovery.  Each factor cannot be considered in isolation and in fact are all dependant on one another, therefore the fragility of the economy is determined by a fine blend of how all of these are managed and controlled.

Publicity is a powerful tool where positive news will engender confidence in numerous areas of the economy, particularly the housing market.  Very few will be willing to buy or sell property in a stagnant or reducing market, however as soon as the message changes to something more positive, we see what we are seeing now, where more properties are put on the market and house prices start to increase.  The government will no doubt point to their ‘help to buy’ scheme as a key factor that has kick started the housing market, which may well be true, however my concern is what will happen in a few years time when the effects of the help to buy start to wear off.  In order to use the first part of the scheme borrowers will first need to save a deposit of 5% of the value of the property they want to purchase.  They will then be able to apply for an interest free loan for a further 20% of the value of the property, to a maximum loan value of £120,000. Repayment of the loan will then be made when the property is eventually sold. After five years the loan will start to attract what the government call a ‘fee’, which is basically interest at a rate 1.75%.

The upshot of the help to buy scheme is that purchasers may enter the market before they are financially ready.  If they fail to consider to the financial consequences of future loan repayments (including the 20% borrowed) plus inevitable interest rate rises, in addition to continued increases in the cost of living, then they joy of owning a house is likely to be short lived. As a short term measure there is little doubt that the help to buy scheme will bring more first time buyers to the market, in fact this is already happening.  There is however one fundamental flaw in the scheme.  House prices are determined by the market.  The problem we have in the UK, one which we have had for many years, is that we just do not have enough houses.  With a restricted supply and high demand the market will naturally re-adjust, resulting in increasing house prices. Incentivising, large numbers of first time buyers and new investors into a market which already has a restricted supply is not the answer.  Investing in large scale housing development is the only real way of dealing with the housing shortage and controlling house prices, something that our UK government seem incapable of resolving.

Also we are likely to see continued increases in house prices in the UK through 2014.  This is not good news for those looking to enter the market for the first time.  Increasing house prices mean that deposits will also increase proportionally, therefore first time buyers should consider entering the market as early as possible in 2014, to reduce the impact of likely increases. 

In conclusion, it would be fair to address the optimism in the UK economy and particularly the housing market with a note of realism.  Yes, we are starting to see some improvement, however we have a long road ahead to achieve a sustainable recovery.  Short term optimism does not mean long term stability. Do not be misled by the decision makers and policy makers who want us to believe (through the media) that all is now fixed and we that we can go out and borrow beyond our means again.  This is exactly the approach that got us into a mess last time around.  It is a sustainable recovery and a stable economy that we are striving for and this cannot happen overnight.

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