Turnover a bigger issue than house prices?

House prices tend to dominate the media’s coverage of the UK housing market, but it is, in fact, transaction numbers that provide the better indicator as to the health of the residential property market.

These figures determine the ease with which homeowners can move, the pace at which they can work their way up the housing ladder and the frequency of the steps required to do this.

Relationship with house prices

Historically house prices and turnover rates go hand-in-hand. When prices fell by 14% in 2008, transactions fell from 1.6million to just over 900,000. In 2009, it was a different story and mainstream house price growth was disconnected from transactional activity (See Graph 1).

When the Nationwide quarterly index of UK mainstream house prices showed a 3.4% increase, transaction levels remained below 860,000 and values were driven upwards by low stock levels, in what remained a partially functioning market.

Over the past two years transaction levels have been 30% less than the previous low of 1992, when confidence in the housing market reflected three years of price falls.

The fall in turnover was initially a function of the squeeze on mortgage finance, although, over the course of 2008 and early 2009, it became a function of negative buyer sentiment, fuelled by uncertainty regarding the economy and the (as yet unknown) potential extent of house price falls.  

Thankfully, as sentiment improved so did turnover, rising from 41,000 transactions in January 2009 to 86,000 in July. However, over the next five months, transaction rates hovered between 80,000 and 90,000 per month, before increasing in December as the end of the stamp duty holiday approached.

Short-term indicators

Mortgage finance remains the biggest constraint on the market, and the short-term indicators give us little room for optimism this year (See Graph 2).

Transaction rates fell back to below 60,000 in both January and February 2010. This can partly be explained by the time of year and also the weather conditions, but nonetheless the rates were nearing 50% off the norm for these two months.

Mortgage approval figures, which are a lead indicator of future transactions, remain heavily suppressed, and while transactions in March improved they remained well below the monthly average for the second half of 2009.

Perhaps more of a concern is the fact that political and economic uncertainty has pushed the balance of opinion within The Bank of England Credit Conditions Survey for the first quarter of 2010 towards a marginal softening of demand for secured lending.

This comes at a time when, irrespective of whether this is pre-election jitters, the Royal Institution of Chartered Surveyors reports that more stock is coming to the market, pointing towards further short-term volatility in house prices.

Nationwide figures for the first quarter show that there has already been a slowing of house price growth in the mainstream market throughout the UK  and a return to price falls in the three regions of northern England.

Mortgage lenders emerging

Yet significantly, according to the Bank of England, for the first quarter of 2010 there are signs of improvement in loan-to-values and, in some cases, lenders’ margins are reducing in response to the emergence of some competition in the lending market.

This is an important change, even if the immediate impact on transactions is negligible, because we expect a buyer’s ability to obtain a mortgage to be the primary driver in the housing market over the next decade. For as long as this market remains inaccessible to many, it will drive a wedge between the equity-rich and equity-poor markets.

The distribution and timing of price growth will be dictated by the speed at which pent-up demand builds and is released into the home ownership market.

In the past two years the number of housing transactions has been down by 1.5 million when compared to normal market conditions. This is measured against the 10- and 30-year averages for housing transactions in the UK. This is a much larger figure than we have seen before.

Some pent-up demand will be pushed sideways into the private rented sector, most noticeably in the lower tiers of the market but also increasingly toward smaller family houses. The simple laws of supply and demand dictate that this is likely to lead to rental growth.

The geographical wedge

As far as owner-occupiers are concerned, the progressive ability of potential buyers to meet lenders’ mortgage requirements is likely to see a repeat of the geographical transaction patterns that emerged between 1995 and 2002.

During the first half of the last housing cycle a significantly higher proportion of owner-occupied stock changed hands in the South of England compared to the North, with corresponding house price differentials. If anything, the effect will be more pronounced in this decade.