It’s prediction time again and we are awash with a slew of forecasts for the property market in 2014.
I’m not certain that predictions are of any great value. Earlier this year, remember, we were worrying about a triple dip recession and no-one had heard of Help to Buy. Which only goes to show that no-one really knows what will happen next year – sorry.
But what we do know is what influences the market and that at least tells us something about what to look out for in 2014.
Rule number one; the state of the property market ultimately depends on mortgage lending. Mortgage lending started to improve this spring (largely thanks to Funding for Lending) and the number of property sales followed. The number of mortgage has grown more sharply since the launch of Help to Buy opened up the market to buyers with smaller deposits.
The Bank of England will be closing the Funding for Lending scheme to mortgage lending in 2014, but it is doing this on the basis that mortgage lenders can get that money easily enough from elsewhere. Lenders seem to agree and the Council of mortgage lenders predicts that mortgage lending will grow to £195 billion in 2014, up about 15% from £170 billion this year. You can that report here.
But the Bank also says that is has powers to intervene with mortgage lenders to require them to apply stricter rules on mortgage lending if it (the Bank) thinks the property market is overheating. It could, for example, prevent lenders from extending the mortgage period from the traditional 25 years to 30 years. Or set a cap on the maximum loan for any level of income.
So, the markets will probably allow mortgage lending to improve. The thing to look out for will be regulatory action by the Bank of England.
Even if mortgage availability continues to improve, demand could be hit if buyers (and you may well be one of them) conclude that interest rates are likely to rise soon and by a good deal. The Building Society Association sentiment tracker recently reported that 27 per cent of borrowers fear an increase in base rate over anything else in 2014.
At the moment, the financial markets think that the Bank of England base rate will rise from its current 0.5% in the first three months of 2015. But the expectation is that the rise will be small – to 0.6%. According to the City, the Bank base rate will only reach 1.0% by the end of 2015 and 2.0% by the middle of 2017.
The Bank itself is much more cautious. Spencer Dale, Chief Economist at the Bank told businesses recently that; “You can plan for the future in the knowledge that the MPC intends to keep interest rates low until we’ve seen a prolonged period of strong growth, unemployment is significantly lower, real incomes are higher.” In fact, it is much more likely that the Bank will use it powers to restrict mortgage lending than it is to risk hobbling the recovery by raising interest rates prematurely.
You can argue that what really matters is what mortgage lenders will have to pay to borrow the money they lend to buyers and that is determined by the City, not the Bank. But even there, the news is relatively good. The ‘spread’ between what your lender pays to borrow money and they amount they want to charge you is falling very gradually as competition between mortgage lenders hots up.
True, the spread is still way above where it was before the credit crunch, but it has been falling very gradually since early this year (see graph).
Overall, it seems likely that rates will stay low for a sustained period and that, even if the Bank does increase rates sooner than it says it will, competition between lenders will help to cushion the blow. The key metric to look out for here, however, is market expectations of future interest rates rather than changes at the Bank of England.
Demand and supply
Sales outpaced new instructions in 2013 and stock levels have fallen accordingly. Short of changes to mortgage lending and interest rates (see above), there is no obvious reason why demand would fall next year.
So the big unknown is whether there will be a corresponding rise in the number of homes coming on to the market. There has been a very gradual increase in the number of homes coming to market in the last few months, but not enough to outpace the increase in sales.
The return of first time buyers (who don’t have a house to sell) adds to demand, but not to supply, and not all of that demand will be absorbed by new construction. An increase in supply will depend on existing homeowners deciding to move home and so sell their existing property.
That is likely to happen to some extent as renewed confidence in the market will encourage some who have postponed a move to act now. But if all of these movers intend to buy as well as sell, the increase in supply will always be matched by demand. On balance, it seems likely that demand will continue to exceed supply. The key metric to look out for is stock levels. If they start to rise, that would signal a major shift in the balance of demand and supply.
In normal circumstances, an imbalance of demand over supply would lead to rising prices. Indeed, there are a growing number of reports that this is happening. The ONS has just reported that prices in Scotland to October this year were 3.3% up on the same time last year. You can see that report here.
But be careful what you read in to these results. For example, in October the Registers of Scotland reported house prices in Scotland rising by 1.5%.
But that overall figure included a sharp rise of 10% in Aberdeen and a fall of almost 9% in East Dunbartonshire. The graph to the right (which relates to a slightly earlier period) illustrates the point perfectly. In short, the average figure is wrong for anyone in either Aberdeen or East Dunbartonshire. Even in Glasgow, the trajectory of prices will vary from one area to the next.
So, while some areas are seeing the return of closing dates, others are still in the doldrums. Whether prices are rising, falling or staying the same in your specific location is impossible to tell from the raft of house price reports that are issued every month or quarter. If that is the level of detail you want, you need to talk to a professional with local knowledge.
Nevertheless, if average price rises are sustained, the more likely it is that this will affect a wider range of property types and locations. Are we about to see that happen?
Once again, nobody really knows. It is almost certainly true that prices stopped falling in most areas at some point this year. It is not unrealistic to believe that there could be some recovery in prices in 2014.
But three points to bear in mind.
Firstly prices in the west of Scotland dipped quite sharply earlier this year. Even a 5% recovery in prices would only get us back to roughly where we were this time last year.
Secondly, prices in this area are still below their peak in 2007. In London prices are reported to be above where they were at the last peak and other parts of the South East of England seem to be moving in the same direction. But here, prices will have to rise quite sharply, by as much as 20% in some areas, to get back to that level.
Thirdly, there is a limit to the amount buyers can borrow without a return to growth in real incomes. In the last few years, wages have stagnated while costs have risen. That limits the amount we can afford in mortgage payments at exactly the point at which the lenders are being more thorough about checking our income and more cautious about testing our ability to withstand shocks such as a rise in interest rates. That will tend to put a cap on how much prices can be pushed upwards.
The key metric here is not so much about house prices as it is about income growth. If incomes start to rise faster than inflation (and house prices) the improvement in affordability will give buyers the financial firepower to push prices higher. Without that, there is a limit to what demand can do. Of course, if incomes do start to outpace inflation, the Bank of England will probably see that as a signal to raise interest rates.