2009 Housing Forecast by MHairston

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									      RICS Economics
      December 2008
                                                                                                  RICS UK housing forecast December 2008                                              1



      2009 Housing Forecast


Transactions to edge up but prices to
remain depressed
•       Transactions to gradually pick up through 2009                          forecasters is that for the whole of 2009, GDP will
•       Peak to trough price decline of at least 25% (on                        contract by a further 1.5%. This, it is claimed, could
        Nationwide Building Society house price index)                          result in the jobless total climbing from its current
•       New starts in England to drop below 80,000
                                                                                level of around 1.8 million to something in excess
                                                                                of 2.5 million. We broadly go along with these
                                                                                projections.
It would be something of an understatement to say
that economic events are moving quickly at the                                  Such a sharp rise in unemployment will inevitably
present time. The shift in sentiment since the                                  have some impact on buyer confidence,
collapse of Lehman Brothers back in September has                               depressing transactions. At the same time, the
been quite unprecedented. Against this backdrop,                                downturn threatens to push up repossessions and
any assessment of the outlook for the UK housing                                forced sales, increasing stock on surveyors’ books.
market inevitably carries a greater layer of risk than                          This imbalance is already to some extent being
would typically be the case. The consensus view is                              reflected in the slide in the closely-watched RICS
that residential prices (based on the mortgage                                  ‘sales to stock ratio’. Interestingly, as chart 1
approval indices compiled by HBOS and the                                       shows, in the last downturn the ‘sales to stock
Nationwide Building Society) are likely to decline by                           ratio’ fell sharply in advance of the jump in the
a further 10% - 15% over the course of 2009. That                               claimant count. Subsequently, the ratio remained
would take the peak to trough drop to somewhere                                 at very low levels as the claimant count soared.
between 25% and 30%. We see little reason to                                    Chart 2 demonstrates that the ‘sales to stock
demur from this view. Such an outcome is broadly                                ratio’ has tended to move closely with the net
consistent with the results from the latest RICS                                balance of surveyors’ ‘expectations on house
housing market survey. However, the survey also                                 prices’ – both are at historic lows and point to
provides some evidence to suggest that transaction                              further price weakness over the next six months.
activity, which has been particularly badly hit, may
now have reached a trough.                                                      A key downside risk to our current outlook is that
                                                                                the recessionary environment proves rather more
In this forecast update, we briefly examine the                                 protracted than is currently envisioned resulting
likely drivers of the housing market over the course                            in unemployment climbing back to, if not above,
of the next year including the economic backdrop,
the availability of credit, housing affordability, the                          Chart 1
prospects for repossessions and housing supply.                                 %                                                                               change mth on mth
                                                                                                  Sales to Stock Ratio and Unemployment Claimant Count
                                                                                90                                                                                              150

Economic weakness will continue                                                 80
                                                                                                                                                                                100
                                                                                70
All lead indicators of the economy including the
                                                                                60                                                                                              50
closely-watched CIPS surveys as well as key
measures of both business and consumer                                          50
                                                                                                                                                                                0
confidence have either hit or are flirting with                                 40

historic lows. On the back of this, the respected                               30                                                                                              -50
research institute NIESR is now claiming that                                   20
economy shrank by a hefty 1% in the three months                                                                                                                                -100
                                                                                10
to November following the 0.5% drop in Q3. Worse
still, the consensus view amongst leading                                        0                                                                                              -150
                                                                                Jan-84   Jan-87    Jan-90       Jan-93      Jan-96     Jan-99     Jan-02    Jan-05     Jan-08

                                                                                                            Sales to Stock Ratio     Claimant Count (RHS)            Source:RICS,ON




    RICS represents 110,000 chartered and technical surveyors worldwide.        organisation, RICS acts in the public interest, upholding standards of
    These professionals provide expert advise on land, property, construction   competence and integrity among its members and providing impartial,
    and the associated environmental issues. An independent, not-for-profit     authoritative advice on issues affecting business and society.
2       RICS UK housing forecast December 2008




the 3 million mark. In that environment, the                                                       competitive lending rates require deposits of at
probability of seeing a peak to trough decline in                                                  least 25%. Limiting the amount that consumers
excess of 25% would inevitably be higher.                                                          can borrow is effectively placing a ceiling on
                                                                                                   house prices.
Credit conditions remain tight for now
                                                                                                   The lack of mortgage finance has also resulted in a
Meanwhile, the authorities are pulling on a whole                                                  sharp and prolonged drop in activity, as measured
range of levers to counter what is increasingly                                                    by mortgage approvals data and Land Registry
being viewed as the most challenging set of                                                        transaction figures. Indeed, over the past three
economic circumstances in more than seventy                                                        months, mortgage approvals have hovered just
years. Lending to consumers has been particularly                                                  above 30,000 per month, compared to the
hard hit. In the wake of the sub-prime crisis and                                                  129,000 seen in November 2006, at the peak of
subsequent collapse of financial institutions,                                                     the recent boom. To put this in some context,
lenders have felt under pressure to improve their                                                  Bank of England numbers show that total number
capital ratios and avoid transactions with any sign                                                of mortgages approved for residential purchases
of risk. In response to the deteriorating outlook,                                                 in 2007 amounted to 1.25m. For 2008, the outturn
interest rates have been cut to just 2% and look                                                   is likely to be close to 530,000. As a result of low
certain to go lower in the new year. We are                                                        mortgage approvals, transactions have fallen off a
currently pencilling in a further hundred basis                                                    cliff. The most recent Land Registry records, for
point reduction in the first quarter of 2009 but,                                                  August, show that transactions were 64% lower
with a view to recent action taken by the US                                                       than 12 months earlier. But our suspicion is that
Federal Reserve, it would be a mistake to rule out                                                 the level of activity in the property market, as
something more dramatic. Despite the measures                                                      reflected in both the level of actual transactions
                                                                                                   and the more-timely mortgage approvals data, is
Chart 2                                                                                            now pretty much at a trough.
    %              Sales to Stock Ratio and Expected Change in Prices            % net balance
70                                                                                           80    A panoply of state guarantees are either in place
                                                                                             60
                                                                                                   or being actively considered and a good deal of
60
                                                                                                   pressure is being placed directly on the financial
50
                                                                                             40    sector to increase lending. Recent intervention
                                                                                             20
                                                                                                   programmes from the Government and Bank of
40                                                                                                 England (such as the Special Liquidity Scheme,
                                                                                             0     Credit Guarantee Scheme and, most recently, the
30
                                                                                             -20
                                                                                                   recommendations in the Crosby Review) are
20
                                                                                                   designed to address this problem. These schemes
                                                                                             -40   differ in the details but essentially offer the
10                                                                                           -60
                                                                                                   opportunity for lenders to access funds from
                                                                                                   either the Bank of England, the Treasury, or the
    0                                                                                        -80   wholesale funding markets, with the intention of
    Oct-98    Oct-00            Oct-02             Oct-04               Oct-06         Oct-08
                                                                                                   increasing lending to consumers. RICS broadly
                       Sales to Stock Ratio     Price Expectations (RHS)             Source:RIC
                                                                                                   supports an intervention programme that focuses
                                                                                                   on making funds available to creditworthy
taken to date, the mortgage lending market                                                         borrowers so long as it is structured in such a way
remains effectively closed to all but the most                                                     as to not encourage a return to risky lending
creditworthy borrowers with relatively high                                                        practices of recent years.
deposits.
                                                                                                   It is possible that the combination of the dramatic
While relaxed credit conditions are widely
                                                                                                   ease in monetary policy allied with a successful
acknowledged to have provided fuel to the boom
                                                                                                   intervention by the authorities to ensure a
in house prices, the rapid reining in of lending has
                                                                                                   resumption in the flow of mortgage finance will
been an equally essential part of the
                                                                                                   help limit the extent of further downside to house
subsequent downturn. The housing market is now
                                                                                                   prices from current levels. That could conceivably
characterised by limited and cautious lending.
                                                                                                   pave the way for a turnaround in the market
Since early 2008, 100%+ loan to value ratios have
                                                                                                   during the latter part of 2009.
disappeared from the market and the most
                                                                                                                                        RICS UK housing forecast December 2008   3




Chart 3                                                                                                                       sees scope for mortgage approvals over the next
                                                                                                                              twelve months to climb back towards the 600,000
250
                Mortgage affordability - Index of percent of income devote to mortgage repayments                             area (the annualised number of mortgage
                (1983Q1=100)
                                                                                                                              approved over the past three months was less
200                                                                                                                           than 400,000).

150                                                                                                                           Affordability still looks stretched

                                                                                                                              A pick-up in housing transactions will not
100
                                                                                                                              necessarily reduce the likelihood of further falls in
                                                                                                                              house prices in the short term, particularly as
50                                                                                                                            affordability remains stretched. Affordability is an
                                                                                                                              important concept for assessing what might be
                                                                                                                              considered ‘fair-value’ in the housing market. Two
  0
 1983 Q1         1988 Q1                   1993 Q1                  1998 Q1              2003 Q1                    2008 Q1   of the key affordability indicators are the house
                                 Mortgage repayment as % of income                                                            price to earnings ratio and mortgage repayment
                                                                                    Source: CML, Nationwide
                                 Interest only repayment as % of income                                                       as a percentage of income. Both these measures
                                                                                                                              still look somewhat overvalued relative to long
As yet, however, there are few signs of                                                                                       run averages.
improvement in lending behaviour although it’s
worth remembering that the recommendations                                                                                    The percentage of income devoted to mortgage
suggested by Crosby have yet to be agreed on and                                                                              repayments remains about 40% above its long run
implemented. One interesting development is the                                                                               average. In the previous downturn, the worst
emerging trend in the RICS ‘new buyer enquiries’                                                                              point of affordability reached 68% above the long
series; this has been becoming progressively less                                                                             run average. But over that period, the burden of
negative for the past six months. In November it                                                                              repayments came from the high interest rates. As
not only turned positive but actually climbed to its                                                                          Chart 3 shows, the same has not been true of the
best level since October 2006. This probably                                                                                  most recent housing boom which, if anything,
reflects in part both the drop in house prices and                                                                            saw high levels of borrowing fuelled by low
the cut in headline interest rates. It is also                                                                                interest rates. Indeed, based on CML data for
significant that surveyors in the housing survey                                                                              interest only mortgage repayments, affordability
are pointing to an increasing share of                                                                                        is now only 20% above its long run average, as
opportunistic interest particularly from investors.                                                                           opposed to the 72% seen in the 1990s boom. That
                                                                                                                              suggests that the burden of repayments may now
Even if the ‘new buyer enquiries’ series were to                                                                              be more against the principal than the interest.
retrace some of the recent gains (as we expect) in
the face of a more meaningful deterioration in the                                                                            According to the Nationwide Building Society, the
labour market, some pick-up in transaction                                                                                    average house price to earnings ratio (HPE) at the
activity is likely over the next twelve months. RICS                                                                          end Q3 2008 was hovering around 4.7, down from
                                                                                                                              the peak of 5.4 reached in Q2 2007. That was the
Chart 4
                                                                                                                              lowest level since Q4 2005 but still around 40%
80
                     House price to earnings ratio - % above long run
                                                                                                                              above the long run average of 3.2. By the end of
70
                     average                                                                                                  2008, the HPE is likely to have dropped back to
                                                                                                                              around 4.1. That would be roughly in line with the
60
                                                                                                                              average over the last 10 years. As chart 4 shows,
50                                                                                                                            however, there is significant variation across the
40
                                                                                                                              regions. Northern Ireland, which experienced
                                                                                                                              some of the most rapid house price inflation,
30
                                                                                                                              remains the most overvalued where, in Q3 2008,
20                                                                                                                            the HPE was more than 75% above its long run
10                                                                                                                            average. By contrast, the measure for East Anglia
                                                                                                                              was only 26% above the long run average. With
 0
                                                                                                                              that in mind, it seems likely that house price falls
      th




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                                                                                                         Source: Nationwide
                                                                                                                              where affordability remains most stretched.
4        RICS UK housing forecast December 2008




    Chart 5
                                                                                                       This may, in part, be a reflection of the increasing
                                                                                                       pressure that it is being placed on lenders to avoid
     %                 Mortgage Repossessions to Mortgage Arrears
45                                                                                                     going down this route. Alongside the recently
40
                                                                                                       announced Homeowner Mortgage Support
                                                                                                       Scheme and the existing Support for Mortgage
35
                                                                                                       Interest Scheme, this should go some way to
30                                                                                                     lessening the rise in actual repossessions going
25                                                                                                     forward. At the same time, lenders may also be
20
                                                                                                       more willing to look at alternatives based on
                                                                                                       reduced payments, extended terms or even debt
15
                                                                                                       for equity deals putting borrowers in a shared
10
                                                                                                       equity position. For the whole of 2008, the
5                                                                                                      number of repossessions is likely to be in the
0
                                                                                                       ballpark of 40,000. This compares with just over
1985Q2      1988Q2    1991Q2       1994Q2         1997Q2     2000Q2      2003Q2      2006Q2            26,000 last year and a high water mark of 75,500
                Mortgage Repos/ Arrears 3-6mths       Mortgage Repos/Arrears 6-12months   Source:CML   the last major downturn (1991). Our suspicion is
Certainly affordability has improved over the last                                                     the 2009 number will end up being a little short of
12 months as house prices have fallen rapidly, but                                                     this previous peak.
most indicators suggest that ‘fair-value’ has yet to
be reached.                                                                                            Supply set to fall further

Mortgage Repossessions Set to Increase                                                                 Much has been made in recent months of a
                                                                                                       shortfall in housing starts this year. But it is
We referred earlier to the likely increase in forced                                                   something of a misrepresentation to suggest that
selling as the pain of rising unemployment begins                                                      the Government’s current target for house
to bite. Significantly, the RICS ‘new instructions’                                                    building in England is 240,000. Although the
series from the Housing Survey provides little                                                         headline number is correct, it was very much
evidence of a material increase in supply onto                                                         framed by the NHPAU (the Government’s advisor)
estate agents’ books to date. However we do                                                            in terms of ‘net additions to the stock’ rather than
expect the net balance of new instructions to                                                          actual new build. In addition, the aim was to get
move into positive territory over the next few                                                         to this figure by 2016 rather than immediately.
months as the pain becomes more widespread.                                                            That said, the latest housing starts data makes it
                                                                                                       pretty clear that supply will be constrained in the
There are certainly signs that the pressure is                                                         near term. In total only 22,210 residential
building if only through the rise in mortgage                                                          buildings were initiated in England in the third
arrears. Third quarter figures from the Council of                                                     quarter. This means that for the whole of the year
Mortgage Lenders shows the number of secured                                                           starts are unlikely to come in much above
loans more than three months behind in payment                                                         110,000, a figure way lower than anything
climbing to 168,000 which amounts to 1.44% of                                                          recorded in the recession of the early 1990’s.
the total. It is hard not see this proportion rising
sharply over the coming months. The more                                                               Chart 6 tracks ‘private sector house building
significant issue for the property market is the                                                       workloads’ from the RICS Construction Survey and
extent to which this gets translated through into                                                      actual housing starts. Both series show a broadly
higher levels of repossessions. In this area, there                                                    similar, if depressing picture. Output expectations
are some conflicting trends. Actual repossessions                                                      over the next twelve months (for the whole of the
rose to 11,300 in the third quarter. More                                                              construction sector) according to the RICS survey
relevantly, as chart 5 highlights, the repossessions                                                   have also plunged to a new low suggesting that
to arrears ratio has climbed sharply and is now                                                        new starts in 2009 could turn out to be less than
some way ahead of the experience seen in the last                                                      80,000. None of this is going to provide much near
recession.                                                                                             term support for the housing market but it does
                                                                                                       highlight the medium term risk for prices. For all
It is, however, noteworthy that although ‘claims                                                       the talk of ending boom and bust, looking beyond
issued’ (the first stage of the repossession                                                           the current crisis there is little evidence that the
process) rose very rapidly in the first quarter of the                                                 policies are in place to create a more sustainable
year they have subsequently begun to stabilise.                                                        housing market.
                                                                                                               RICS UK housing forecast December 2008   5




 Chart 6

                              RICS Housing Workloads and Housing Starts in England           level
       % net balance
 60                                                                                                  50,000


 40

                                                                                                     40,000
 20


  0
                                                                                                     30,000
 -20


 -40
                                                                                                     20,000

 -60


 -80                                                                                                 10,000
    Q294           Q296        Q298        Q200        Q202         Q204        Q206       Q208

                       Private Sec Housing Workloads     Housing Starts in England (RHS)   Source:RICS, DCLG




Summary

With lenders likely to remain generally cautious
for some time to come and the economy heading
deeper into recession, early relief for the housing
market seems improbable. A further decline in
house prices (based on indices compiled at
mortgage approval stage) of around 10% is our
central expectation although we would
acknowledge that the risks to such an outturn are
skewed on the downside. Transaction activity is,
however, now bumping along the bottom. Even
without the support of any guarantees to
encourage the purchase of residential mortgage
backed securities (as recommended in the Crosby
Review), sales should rise by more than 10% over
the course of 2009.




                                                                                                                                       The Royal Institution of
                                                                                                                                       Chartered Surveyors
                                                                                                                                       12 Great George Street
                                                                                                                                       Parliament Square
                                                                                                                                       London SW1P 3AD

                                                                                                                                       T +44(0)20 7334 3774
                                                                                                                                       F +44(0)20 7334 3795

                                                                                                                                       economics@rics.org.uk
                                                                                                                                       www.rics.org

								
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