Residential Market Update – Knight Frank

June 2009 Residential Market Update

By Liam Bailey, Head of Residential Research, Knight Frank

UK housing market update

House prices appear to be on the rise, according to at least one index. Nationwide reported that prices rose 1.2% in May. This is the second rise in three months, meaning that prices are now 2% higher than they were in February. The recent price rises mean that the annualised rate of price change has eased considerably from 20% earlier this year to a little over 11% now, although prices are still 17.2% below their peak level. The average UK price now stands at £154,016 – according to the Nationwide.

At a regional level, Northern Ireland has led the downturn, with prices already 39% below the high they hit in 2007. Aside from Northern Ireland, where the housing market had become even more overheated than the rest of the UK, the decline in prices has been led by southern England, including London (down 20%-22%). The most resilient regions are Scotland (down 14%) and northern England (down 16%).

In recent months we have experienced a much more benign, but fluctuating, environment in the residential market in terms of price performance. The period of continual and rapid price declines, which we saw in late 2008, has been replaced by a situation when prices are alternatively rising and falling month by month.

The sharp cuts to interest rates have meant that the cost of mortgage finance has fallen. In April the average two year fixed rate on a 75% loan to value averaged 4.02% and the average standard variable rate was 3.82%, the same rates were 6.06% and 7.23% respectively a year earlier. For those with smaller deposits average rates are still relatively high but are beginning to edge lower as some banks try to grow market share.

Mortgage market liquidity has been a key determinant of lower prices over recent months. The Bank of England reported that the number of loans for house purchase rose 8% between March and April to stand at 43,201, the highest for 12 months, although this number is still 22% below the figure for April 2008 and 60% below the total for April 2007.

The modest improvement in mortgage conditions has fed through to actual sales. The Inland Revenue reports house sales in April were only 28.9% lower than in April 2008, although still 55% lower than April 2007.

Residential rents across the UK have declined by around 6% over the past 12 months. Rising supply has been the key issue impacting on the market, with the supply of flats in particular up by between 50% and 100%, depending on location. Rising supply has not only impacted on rents, but also on void periods which have increased from 3.3 weeks per year in Q1 2008 to 4.3 weeks per year in Q1 2009.

Gross investment yields have hovered at around the 5% level for several months and with capital price falls easing and rents continuing to slide – income returns are unlikely to improve significantly in the next year.

Housing market outlook

Despite the good news in the housing market over the past three months, in our view it seems inevitable that prices will edge lower in the UK through this year. However, future price falls are likely to be capped at 5% to 10% and the low point in pricing is likely to be reached during Q1 2010.

Despite the above warning, it remains the case that in many parts of the country sales activity is beginning to rise on the back of a combination of – government encouragement and support, but also due to the fact that buyers are beginning to sense that they are buying at or around the bottom of the market.

The most significant issue for the market remains access to mortgage finance. With lower interest rates and lower mortgage rates the picture is improving, but for those without access to a significant deposit (and that still means 25% of the purchase price) rates are still relatively high.

It would seem fair to expect the situation on mortgage finance availability to remain tight through 2009 and into 2010 – but the direction will be towards an easing of constraints by the second half of 2010 which would begin to permit greater sales activity in the market. Interest rates could well be rising by this time, which might counteract the impact of easier credit.

Knight Frank can be contacted on 020 7629 8171 or by going on-line at: www.knightfrank.com