Are UK property prices headed for a fall?

By Noel Meredith, Executive Director, United Trust Bank

The Nationwide Building Society’s house price analyst Robert Gardner has described the outlook for the UK property market as ‘highly uncertain’. It is the most downbeat message to come out of their long-running house price index in several years and was made despite the index showing a monthly increase in national property prices of 0.8%, pushing annual house price inflation from 10.6% in July to 11% in August.

Mr Gardner’s caution is based on a 20% fall in the number of mortgage approvals between January and May this year and reports from surveyors and estate agents that they were seeing fewer sales enquiries. In his opinion he felt that activity was ‘cooling’ and that the possibility of interest rate increases and continued pressure on wage growth could ‘temper demand in the quarters ahead’.

Just a few weeks ago, in an article commissioned by United Trust Bank, John Stewart, the highly respected Director of Economic Affairs at the Home Builder’s Federation, was unequivocal on the notion of a house price bubble. He wrote: “After more than five years of the longest and deepest housing crash for decades, overnight we are apparently in a housing bubble, with nothing in between. This is of course nonsense. There is no housing bubble outside the overwrought imaginations of journalists”.

However, although Mr Gardner’s “highly uncertain” comment is bound to be the most quoted sound bite of August’s index, the two experts are not so very wide apart in their views on the possibility of a house price crash, which the use of the term ‘bubble’ always implies is just around the corner. Both agree that property prices will remain supported by a general shortage of housing and low interest rates which, when they do start to rise, will increase slowly and probably settle at a much lower level than we’ve previously been used to. Most experts agree that the ‘normal’ interest rate level is likely to be around 3% rather than the 5% we saw leading up to the financial crisis.

Of course, much of the speculation of a house price bubble has been generated by the price rises seen in the Capital. July’s Land Registry data indicated that London house prices had increased by 19.3% in the previous 12 months, the highest annual increase for a decade, and although John Stewart commented that “…prices in London seem detached from economic reality” he also suggested that the enormous supply/demand imbalance made the prospect of London prices tumbling difficult to believe.

The majority of finance brokers and developers who took part in our recent survey seem to concur with Mr Stewart that an imminent London house price crash is unlikely. 69% of respondents could not foresee a significant (20% or more) drop in London house prices within the next three years. However, when asked if the London housing market was becoming ‘unhealthily overheated’ many have some concerns with 48% saying ‘Yes’ and 41% saying ‘No’. News that some areas of London such as Lambeth and Waltham Forest have seen house prices rise by nearly 30% in the last year will add to the debate and no doubt push the ‘London bubble’ theory further.

What most people in property agree though is that in order to solve the housing market’s deep structural problems we need to build a lot more homes. In 2013/2014 112,630 new homes were completed in England against an estimated 240,000 per year target required for the next 20 years. The good news is that house builders increased private starts by 34% between March 2013 and 2014 and England’s planning system has been vastly improved with the National Planning Policy Framework. Demand stimulus from Help to Buy and likely increases in projects by housing associations and local authorities should further help to bridge the housing gap.

All but the largest house builders are reliant to some degree on lenders which are willing to back their projects. So whatever the latest index, report or scare story says, whether the headlines are signalling boom or bust, what developers and the whole country needs now more than ever are experienced and pragmatic lenders which can keep Britain building.