14th Sep 2023 12:37
(Alliance News) - The UK housing market saw a "deepened" correction to prices in August, according to analysis from Berenberg reacting to the Royal Institution of Chartered Surveyors UK house price index numbers on Thursday.
UK house prices declined at their fastest rate since 2009 in August, according to Rics, although it added the rental sector saw prices being pushed up by a "yawning gap" between demand and supply.
A net balance of 68% of property professionals reported house prices falling rather than rising, marking the most negative reading since 2009, according to Rics, which pointed to the impact of high mortgage rates.
New buyer inquiries also declined further during the month, with a net balance of 47% of professionals reporting fresh inquiries falling rather than rising, deteriorating from a balance of 45% the previous month.
New sales instructions also fell, as did newly agreed sales, Rics said.
A net balance of 47% of surveyors reported sales falling rather than rising, marking the weakest reading since the depths of the coronavirus pandemic.
"Although the sharp drop in the August Rics index points to an accelerating decline in house prices in late summer, forward-looking data do not indicate that the peak-to-trough decline will be greater than previously feared. Following a sharp fall during spring, sales expectations ticked up in August... while new buyer enquiries continued to move sideways," said Berenberg analyst Kallum Pickering.
"The dual shock of falling real incomes and tightening financial conditions since the middle of 2022 has weakened housing demand significantly. Falling house prices, plunging transactions and sinking market confidence all point towards a housing market that is suffering a sharp correction."
Pickering continued: "But real incomes are now rising again as inflation falls and wage growth remains strong. Furthermore, the Bank of England looks set to hike just one more time to a 5.5% peak rate on September 21. With peak interest rates in sight, money markets and mortgage providers are starting to wonder when the BoE could start to cut rates – likely in [the second quarter of] 2024. Falling mortgage rates in anticipation of BoE cuts plus further real income gains can support housing demand next year."
Looking ahead, the Rics report said near-term sales expectations remain subdued.
In contrast to the house sales market, tenant demand for homes to rent remained strong in August, with a balance of 47% of professionals noting an increase.
In signs of an imbalance between supply and demand, new landlord instructions fell, with a balance of 20% of professionals seeing a decrease.
Given this mismatch, a net balance of 60% of contributors foresee rental prices being driven higher over the coming three months, Rics said.
"It will likely take a few more months for housebuilders to adjust supply to balance the market. That some homeowners who are unable to afford their new higher mortgage rates, as their old cheaper deals expire, may be forced to sell in the coming months poses a modest downside risk. But once supply growth adjusts, prices should start to level off as the overall market reaches a new equilibrium," said Berenberg's Pickering.
Berenberg expects house prices to reach a trough early next year, before momentum "gradually improves" in 2024 and 2025 on the back of a broader economic recovery, further falls in mortgage rates and rising real incomes.
"However, the recovery in demand and transactions may be more restrained than in previous housing market cycles. If the UK economy manages to dodge a recession over winter, still-present inflation risks will prevent the BoE from cutting rates aggressively even after the current bout of excess inflation passes," said Pickering.
"Even if the UK's well-capitalised banks are eager to lend to the market, mortgage rates that are closer to the longer-run average will restrain borrowers' capacity for a few years until wages catch up by enough to bring price-income ratios to a more attractive level."
Overall, Berenberg said the situation was currently bad and will likely get worse, but that a "full-blown housing crisis remains a far-off prospect", in its view.
"By and large, the balance sheet of the UK economy is in good shape. With large buffers to protect against asset price shocks, the risk that a garden-variety housing market correction, such as the one playing out in the UK now, could cause lasting damage remains remote, in our view," said Berenberg's Pickering.
"Unlike in 2008, the UK banking sector is well capitalised and properly regulated, and household debt levels are manageable. Any suggestions that the housing market or economy face a genuine crisis are thus far overblown."
UK housebuilder stocks eased in London trading by Thursday afternoon. Persimmon was down 0.3%, Barratt Developments was down 0.2% and Taylor Wimpey was down 0.3%.
By Greg Rosenvinge, Alliance News reporter
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