Property prices in the UK continued to push upwards in February with a rise of 0.6% month on month taking the average price to £205,846.
The index date from lender the Nationwide also shows that year on year house price growth has increased by 4.5% and more households in England own their property outright than with a mortgage.
The outlook for the housing market is uncertain this year with the formal act of leaving the European Union due to be triggered this month according to Robert Gardner, Nationwide’s chief economist, but he pointed out that the performance of the economy is encouraging.
‘Recent data suggests that the UK economy has continued to perform relatively strongly. The economy accelerated slightly in the fourth quarter by 0.7% and the unemployment rate remained stable at an 11-year low of 4.8%,’ he said.
‘We, along with most other forecasters, expect the UK economy to slow through 2017 as heightened uncertainty weighs on business investment and hiring. Consumer spending, a key engine of growth in recent quarters, is also likely to be impacted by rising inflation in the months ahead as a result of the weaker pound,’ he explained.
‘Nevertheless, in our view a small rise in house prices of around 2% is more likely than a decline over the course of 2017, since low borrowing costs and the dearth of homes on the market will continue to support prices,’ Gardner added.
The index also reveals that cash buyers are currently now a more important driver of housing market dynamics than they were a decade ago. Though the data only extends back to 2005, it suggests that the share of cash transactions increased significantly from around 20% in 2005/2006 to around 35% in 2008 and has remained fairly constant since then.
Gardner explained that the sharp increase in the share of cash purchases in 2007 and 2008 was a function of mortgage transactions declining sharply, rather than the amount of cash transactions increasing.
‘This reflects the impact of adverse labour market conditions and the tightening of credit conditions during the financial crisis, which limited the number of people able to buy with a mortgage, while fewer such constraints would have applied to cash purchasers,’ he said.
‘However, it is interesting that the share of cash transactions has not fallen back as the economy has recovered. Part of the reason is that mortgage market activity has increased only modestly and remains some way below the levels recorded in the mid-2000s,’ he pointed out.
He also explained that the low interest rate environment at home and abroad has also continued to support the flow of cash into other asset classes, including UK residential property and demographics is also playing a role in boosting the number of cash transactions. This is because an ageing population means that the proportion of people who own their home outright has increased, and when these people move or downsize they are more likely to do so in cash.
It is an acute lack of supply that is steadily pushing up prices, according to Jonathan Hopper, managing director of Garrington Property Finders, but buyers remain price sensitive and he believes they will continue to be so.
‘Despite the continued rise in average asking prices, astute buyers are increasingly able to ask for, and secure, sizeable discounts. Buyer confidence is not unlimited and on the front line we’re seeing that buyers, though committed, are highly price-sensitive. February’s surge in consumer inflation, which raises the twin prospects of an interest rate rise and the cost of living rising faster than people’s wages, means caution will remain a dominant force in 2017,’ he said.
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‘The steadily improving picture painted by February’s index is likely to set the tone for the year ahead. On this evidence we expect to see further price rises, but at a more subdued pace as house price to earnings ratios begin to bite in many parts of the country and constrain price growth,’ he added.
Tarlochan Garcha, chief executive officer of peer to peer property lending platform, Kuflink, believes that rising inflation could yet play havoc with household finances, denting consumer confidence and property values.
‘However, low interest rates are whetting the appetite for buyers whether first time or those hoping to move up the ladder. While the property market is resilient, if interest rates do rise, it is likely that would trigger a shift in sentiment and start to put pressure on prices,’ he pointed out.
Sales in the next few months are likely to set the tone for the rest of the year, according to Alex Gosling, chief executive officer of online estate agents HouseSimple. ‘The market needs a confidence boosting Spring period particularly as Article 50 being triggered looms on the horizon. The first cut to mortgage tax relief is also just a couple of months away, and no-one really knows what impact that is going to have,’ he said.
‘The response to the second homes tax that came in last April was dramatic before and after the event, but we didn’t see investors completely desert the market as many people predicted.
Investors quickly adapted to the changes and the same may well happen when the phasing out of mortgage tax relief on buy to lets begins,’ he explained.
‘We could well see more investors buying for cash to negate the impact of cuts to tax relief, particularly people in retirement. Because of pension freedoms they have cash to invest in a buy to let property as part of a diverse investment portfolio, and many probably won’t be looking to take money out of the property to buy another,’ he added.
Russell Quirk, chief executive officer of eMoov is expecting an increase in market activity over the coming months which should further strengthen the upward price trend.
‘It will be interesting to see where we stand after this month’s budget announcement. With an overall air of hesitation in the market, it is likely that many savvy buyers will be holding out to see what the Chancellor has in store, whereas the previous bulletproof nature of the market may have seen them proceed with a purchase regardless,’ he said.
He is hoping that the Chancellor will announce a change to stamp duty at the top end of the market in order to energise the sector which has seen sales and prices fall since tax levels were increased.
