Market slowdown, not breakdown
There is no denying that activity in the UK housing market has been weak over the last 12-months. The latest data from both the Council for Mortgage Lenders (CML) and the RICS highlighted subdued buyer activity, low transaction volumes and flat new buyer inquiries.
Whilst the current lull in activity should not be dismissed, examining this in a historical context should offer some reassurance that this period is unlikely to result in anything more than a rather uninspiring housing market in 2017.
The Land Registry house price index reported approximately 790,115 transactions in England in the 12-months to November 2017 which was below the 20-year average but higher than the period September 2008 to December 2013.
Sales volumes: 12-month rolling
Source: Land Registry, Maslow Capital
The relationship between sales volumes and house price movement is not clear cut. Whilst no two cycles are identical, there have been very few periods over the last 20 years when a fall in transactional activity has directly resulted in a correction in house prices.
The evidence suggests that, at a national level over the last 20 years, this has only occurred twice, once in 2008/2009, and once in 2011 and we know that the factors driving the market prior to the 2008 price correction were quite different to the demand and supply issues at play today.
Sales volumes vs. house price growth: 12-month rolling % change
Source: Land Registry, Maslow Capital
The disconnect between falling sales volumes and prices can be clearly seen looking at the regional level over the 12-months to November. Transaction levels have been declining nationally, whilst prices have continued to grow, albeit at a slower pace.
Sale volumes vs. house price growth: 12-months to November 2016 % change
Source: Land Registry, Maslow Capital
So how long will this period of falling transaction levels last? Historical trends show falling sale volumes for around 10 months through each cycle, however the period directly after the financial crisis was an exception and lasted 25 months. On that basis, we can imagine seeing volumes increasing again by the end of the year, although we have already highlighted that no two cycles are the same, and the unprecedented impact of Brexit is impossible to measure.
In the meantime, low transaction levels will present a challenging environment for the industry in 2017, but there are positive drivers that will keep the market afloat over the next 12-months.
These include pressure on pricing underpinned by a fundamental lack of supply, alongside market demand, albeit softer, which is being supported by historically low interest rates. Additionally, the UK markets’ remarkable resilience to Brexit, the weak pound and supportive government policies will serve to further boost UK residential property this year.
