UK housing market outlook positive, says latest RICS residential survey

Confidence is returning to the UK residential property market following the immediate reaction to the vote to leave the European Union with the market seeing an upturn in August.

Referendum, as the UK residential market experiences a slight upturn in August, according to the latest UK Residential Market Survey.

House price rises are regaining some momentum and sales are holding steady after four successive monthly falls, according to latest residential market survey from the Royal Institution of Chartered Surveyors (RICS).

But the monthly report also suggests that buyer enquiries and sales instructions continue to slip albeit at a greatly reduced pace.

However, surveyors expect that prices and sales volumes will rise going forward, both at the three and 12 month time horizons, with a more stable trend in activity driving the improvement in sentiment.

Overall, the headline price indicator edged higher during August, with a net balance of +12% of respondents reporting an increase in prices, up from +5% previously. This halts a run of five consecutive reports in which the net balance had softened, although the current reading is still the second weakest posted over the past eighteen months.

In London, the net balance remained negative for a sixth consecutive month, with 30% more respondents noting a fall in prices, as opposed a rise. By way of contrast, the net balance figures suggest prices increased in most other parts of the UK.

Looking ahead, national near term price expectations climbed into positive territory for the first time since April, with a net balance of 10% of respondents now anticipating prices will rise over the coming three months.

Nevertheless, expectations remain generally modest across the UK. Contributors are projecting prices in the North East to slip a little further in the near term but London expectations have now stabilised. Further out, over the next 12 months, prices in the capital are projected to see little change, while all other parts of the UK are expected to see house prices drift higher.

The real shortage of property for sale remains an overriding feature of the market, the RICS report says and it is also a key factor supporting prices. ‘This looks set to persist for a while yet as new instructions to sell declined once again during August, albeit only marginally,’ the report points out.

As a result, average stock levels on estate agents books slipped for the third successive month and now stand within a whisker of the record low posted in December of last year. Alongside this, new buyer demand decreased slightly at the national level, although the pace of decline eased significantly, with a net balance of -7% more contributors reporting a fall in demand, up from -25% in July.

In an extra question included in this month’s survey, contributors were asked for a more detailed breakdown of changes in new buyer enquiries over the past three months, looking at trends across different categories of buyers.

The results show enquiries from buy to let investors dropped most sharply with a balance of -57% more respondents citing a decline. Over the same period, demand from first time buyers and existing owners also reportedly fell, but to a smaller degree, returning balances of -15% and -11% respectively.

Following a couple of months in which sales declined sharply in the aftermath of the referendum, volumes stabilised during August, as the agreed sales indicator improved to zero from -32% last time.

However, the report points out that sales still appear to be falling in parts of the country, London and the West Midlands in particular, but the pace of decline has slowed in each case.

Going forward, the sales expectations series for three months ahead, improved noticeably, posting the strongest reading since February. Furthermore, at the 12 month horizon, sales projections have now climbed out of negative territory across all areas of the UK.

In the lettings market, demand from tenants increased at the headline level (non-seasonally adjusted figures), with growth gathering pace relative to the three months to July. At the same time, landlord instructions continued to fall modestly, and this supply/demand mismatch is expected to squeeze rents higher during the year ahead.

‘This is generally the case across the whole of the UK, although London is a slight exception, where respondents envisage virtually no rental growth over the coming 12 months. Interestingly, a net balance of 12% more respondents feel landlords are more likely to decrease rather than increase the size of their portfolio over the next 12 months,’ the report explains.

Stamp Duty changes and scheduled cuts to mortgage interest tax relief are both seen as important factors diminishing the attractiveness of buy to let as an investment. Contributors also sense that landlords are unlikely to expand their residential lettings portfolios over the next five years, but will keep them broadly unchanged.

But it could be the beginning of choppy conditions in the UK housing market, according to
Andrew McPhillips, chief economist at the Yorkshire Building Society. This would be due to people’s uncertainty around how post-Brexit UK will look, he suggested.

‘Despite wider economic uncertainty, the main constraint in the housing market is the lack of supply, which will cause house price inflation to grow at a steeper rate in response to increasing levels of demand,’ he said.

‘In order to make properties more affordable, the UK needs to build more properties and remove other financial barriers for first time buyers and those moving home in order to accommodate increasing levels of demand in the long term,’ he added.