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Housing market confidence slips

Confidence in the housing market slipped in November as home buyers and sellers absorbed the news that base rates had risen to 5% and that further increases may be on the way. 

On average, respondents to propertyfinder.com's November survey expect house prices to rise 5.2% over the next 12 months, down from 5.5% in October. 

Interest rate increases are affecting sentiment

Although 79% of respondents expect the market to continue to rise and only a small minority expect price falls, three quarters (72%) fear further interest rate increases, while half (52%) fear mortgages will become unaffordable.

North-South divide - Prices towards the north to rise less than earnings

The overall UK picture conceals very wide regional variation.  In England, regions to the south expect a far stronger market than regions to the North.  Scotland and Wales are also more optimistic.

If London and the South East are excluded from the figures, then on average, respondents expect UK prices to rise just 4.4%, barely ahead of average earnings growth of 3.9%.  A number of regions in the Midlands and North of England expect house prices to grow more slowly than average wages.

Since October, optimism in the capital has actually increased with respondents increasing their expectations for price rises from 6.3% to 6.6%.  Elsewhere in the UK, people are trimming their expectations for the housing market.

Warren Bright, chief executive of propertyfinder.com commented: “North of a line from Cheltenham to Chelmsford, there is a dramatic change in sentiment on the housing market.  The strong performance of the City is driving the economy in the south, with rich bonus pickings supporting prices.”

“Conversely elsewhere in England, more subdued expectations for house prices suggest housing affordability may actually improve when compared to wages.”

This presents the MPC with a dilemma, argues Bright. Another interest rate increase is clearly not necessary for well over half the country.  Punishing everyone with higher rates to control house prices in the south risks destabilising the whole market.

“Fortunately, people have healthy levels of equity in their homes, giving them an important cushion when they move. On average, buyers want a mortgage worth 61% of the value of their new home meaning that they have over £80,000 of equity to invest.”

Regional detail

Buoyant confidence in Scotland reflects continued momentum in the country's market and the strong contribution that financial services make to its economy.  Booming financial markets have a disproportionate effect on the housing markets in Edinburgh and Glasgow.

Wales is still playing catch up.  With average house prices 23% below the average for England & Wales together (source: Land Registry), there is still room for growth in the Principality.

More than any other region, the South West expects people to keep moving to the area, pushing up house prices on average by 4.8% over the next 12 months.  However, it also the region that most fears interest rate increase.  90% expect rates to rise again.

Although East Anglian respondents expect prices to rise least (+2.4%), their views are less polarised than other regions. A healthy 77% expect prices to rise, but there are few who expect either large increases or large falls.  East Anglians particularly highlighted net inward migration as a reason for the market to be supported.  The large influx of Eastern European migrants is certainly supporting the housing market there, principally the rental sector.

People in the East Midlands also have less polarised views than average.  80% expect prices to rise by 3.9% on average.  People believe the region is a good bet with property investors for rental purposes, although people are more likely here than elsewhere to believe that house prices are high relative to incomes (perhaps explaining why they believe prices will rise less than earnings)

In the West Midlands people are also optimistic on the region's property investment potential.  76% believe prices will rise.  On average people expect prices to rise 4.1%.  As in the East Midlands, people are more likely here than elsewhere to believe that house prices are high relative to incomes.  They believe prices will rise in closely line with average earnings.

With house prices almost 20% below the England & Wales average (source: Land Registry), people again see investment potential for the region.  Overall they expect prices to rise 4.0%, just in line with average earnings. 

This is the least optimistic region in the country.  Just 63% on average expect prices to rise, by 3.6%.  A quarter of respondents expect prices to be flat.

Like the North, the North West is relatively cautious.  Here, 67% expect prices to rise, by an average of 4%.  Relatively optimism in Manchester is responsible for pulling up the average for the region.

The most bullish regions in the UK, both expecting house prices to rise significantly ahead of average earnings.  In London respondents strongly believe their areas are up and coming while those in the South East see net migration boosting the market.