UK Property Outlook Weak

Knight Frank reports that the United Kingdom’s (UK) housing market may see as much as a 2% gain in transactions this year, but that no one should expect …

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Knight Frank reports that the United Kingdom’s (UK) housing market may see as much as a 2% gain in transactions this year, but that no one should expect prices to reach pre-crisis levels until the next decade. If accurate, it will prove to be the longest residential real estate recovery on record, with experts forecasting a full turnaround by the year 2019. Researchers say yet more pricing correction is needed before a true recovery can begin and unusual economic conditions are hampering progress. Although interest rates remain low, many people can’t refinance or secure mortgages for new purchases, which also contribute to a slower recovery. For more on this continue reading the following article from Property Wire.

UK house prices will not reach their 2007 peak until 2019, the longest housing market recovery on record, according to a the latest forecast for the residential sector from Knight Frank.

The consultants say that UK housing transactions are expected to rise 2% in 2013, but will remain well below peak levels for the rest of the decade.

It means that some five years after the start of the financial crisis, the housing sector in the UK still does not bear the hallmarks of a fully functioning market.

Transaction levels have roughly halved since the last market peak in 2007, and are 35% below the 20 year average, as first time buyers and those further up the housing ladder struggle with tighter mortgage lending rules.

‘House prices have been flat or modestly declining across the UK since 2010. This status is underpinned by unusual economic conditions, rather than a genuine equilibrium in the market. The fundamentals suggest that a further correction in prices is needed as the relationship between average earnings and average house prices is well above the long term average,’ said Grainne Gilmore, head of UK residential research at Knight Frank.

‘We believe that the new average at which this ratio settles in the future may be above the historical average, but there is still a further readjustment required to reach that level. Prices have been supported so far by ultra low interest rates. This has resulted in monthly mortgage payments falling for some borrowers. But it has not all been good news for borrowers,’ she pointed out.

‘Those with only a small slice of equity in their property have struggled to re-mortgage, given that many lenders have scrapped the high loan to value (LTV) deals seen before the financial crisis. Instead, lenders in general now lend a maximum of 75% LTV. Only a handful of deals are available above this threshold and the most competitive deals are for those who have 30% or 40% equity. Indeed, most home owners who do not have a 25% chunk of equity in their property must stay with their current lender, and are unable to reduce their monthly mortgage payments by shopping around the mortgage market for a more competitive deal,’ she added.

It also means that first time buyers without a 25% deposit find it hard to climb onto the housing ladder at all, although some government initiatives, such as FirstBuy and NewBuy, have tried to open up the market to those with more modest deposits.

However, Gilmore also points out that the Bank of England and Treasury Funding for Lending scheme, designed to boost mortgage lending as well as the availability of loans to small businesses, has yet to prove that it is really having a significant effect on the market, although there are initial signs that mortgage rates may have fallen slightly.

The good news is that as the UK economy struggles to deliver convincing growth, there seems little chance of interest rates rising any time soon. In fact recent polls of economists show that the first interest rate rise is not expected until 2014 at the earliest, with some analysts expecting rates to stay at current levels until 2017.
 
‘The low interest rate environment will probably continue to put a floor under prices to a certain extent. This signals that rather than another sudden large price shock, home owners face a slow real term erosion of value in their property until the price to earnings ratio once again hits levels closer to the long term average,’ said Gilmore.

But she warns that at some point, interest rates will rise. ‘If they rise slowly, in tandem with a growing economy where new jobs are being created and average earnings are rising faster than inflation, and this is the assumption we have used in our forecasts, the housing market can weather the change,’ she said.

‘But it must be noted that a sudden and unexpected sharp rise in interest rates could have an immediate effect causing a price shock as already over extended home owners are pushed past the limit. Such a move might also force banks, which are showing hitherto unseen levels of forbearance on bad mortgage loans, to take action, which could spur a sharp rise in repossessions, further exacerbating house price declines,’ she explained.

‘In fact, we do not see average prices reaching their 2007 peak again until 2019 which would mark the longest period between price peaks in more than 60 years. Once inflation is stripped out, average UK house prices are unlikely to hit 2007 levels again in real terms until 2031,’ she added.

This article was republished with permission from Property Wire.

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