Most Economists Expect UK Real Estate Prices To Fall In 2010

Fueled by massive government spending, lack of supply and the largest key rate cuts in the country’s history, housing prices in the UK began to rise in 2009, …

Fueled by massive government spending, lack of supply and the largest key rate cuts in the country’s history, housing prices in the UK began to rise in 2009, after falling for two straight years. However, most economists believe that the rise in housing prices is a temporary condition, with prices likely to begin falling again. For more on this, see the following article from Global Property Guide.

House prices in the UK began recovering in early 2009, after two years’ pause.   By Q3 2009 the average price of UK houses was only 3% down from a year earlier (-4.4% in real terms), according to Nationwide, one of the UK’s biggest mortgage lenders.  Prices rose 3.95% (3.3% in real terms) to an average £160,159 (€177,172) during the previous quarter.

Other house price indices broadly confirm this picture.  Halifax reported average house prices 7% down on the year to August 2009, at £160,973, but up 4.2% from April 2009, when prices bottomed.

The Land Registry showed average house prices in England and Wales down 9.7% from a year earlier in August 2009, at £155,968, but up 2.3% from May 2009, when the lowest prices since 2004 were recorded. (Figures from Land Registry, Halifax and Nationwide are all seasonally-adjusted. For descriptions, click here).

Transactions rose 10.5%, to 48,903, during the month of June, 84% higher than the 26,517 transactions in January 2009, the lowest point since data compilation began in 1995.  However, June 2009 sales were 16.6% down on the same month last year.

At the height of the boom in 2005 and 2006, there were 100,000 transactions per month in England and Wales.

The quick (and surprising) recovery of house prices has mainly been due to low interest rates, but also to lack of supply, as many homeowners have taken their properties off the market, to wait for improved conditions.

It is unclear whether the recovery will continue in autumn and winter, when the housing market typically slows. The economy is likely to contract by as much as 4.4% during 2009. There is rising unemployment, and credit conditions are tight.

The big hope is that construction spending for the 2012 London Olympics may help propel the economy and the housing market to recovery.

Regions which rose most, fell most

British house prices rose more than 200% from 1996-2007.

  • Prices in Northern Ireland rose by 458.6% (361% in real terms) from Q3 1996 to Q3 2007, the highest among all the UK regions
  • Prices in London rose 310% (238% in real terms) during this period.
  • Price increases in other regions during this period ranged from 194.5% (143% in real terms) for Scotland, to 266% (202% real) for Outer South East.
  • The national index rose 259% (196% in real terms) over the same period (all figures from Nationwide).

UK property prices peaked in Q3 2007. Then interest rates were raised, and lending conditions tightened, and house price falls accelerated in H2-2008, due to the global financial meltdown and the economic recession. The collapse of Iceland’s banking system led to substantial losses for around 250,000 British depositors, and exacerbated the situation.

The regions that experienced the highest price rises during the boom, generally had the biggest price falls from Q3-2007 to Q1-2009:

  • The average house in Northern Ireland had fallen 39.8% in value by Q1 2009 (-42% in real terms)
  • London house prices had fallen 19.8% (-23% in real terms).
  • Price falls in other regions ranged from 14.1% (-17.85 in real terms) for Scotland, and 25% (-21.7 in real terms) in East Anglia.
  • The national average price fall has been 10.3%.

London typically leads the national real estate cycle. In Q3 2009, the average house price in London was 4.8% up on the previous quarter (4.2% in real terms), at £268,847 (€297,406).

  • House prices averaged £227,208 (€251,344) in Outer Metropolitan London, and £178,208 (€208,746) in the Outer South East.
  • The North has the cheapest average house price at £116,051 (€128,379).
  • East Midlands, Yorkshire & Humberside, and Wales have relatively cheap house prices, at around £134,000 (€148,235).

Government has spent massively to boost economy

In late 2008, to help the housing market, the government suspended stamp duty on houses costing less than £175,000 (extended for three months until December 31, 2009).

The stamp duty levy table is now:


Less than £175,000nil
£175,000 – £250,0001%
£250,000 – £500,0003%
£500,000 or more4%

Other measures to help first-time house buyers and families have included:

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  • A mortgage rescue scheme, to help families at risk of repossession;
  • A shared equity scheme, helping first-time buyers (“Home Buy Direct”). The government and developers contribute up to 30% of the loan value;
  • Millions pounds are being fast-tracked for social landlords and councils, to build affordable homes.

In October 2008, the government injected £400 billion into the UK’s banking system. The main points of the rescue package are:

  • Banks must increase their capital by at least £25bn, and can borrow from the government to do so.
  • An additional £25bn in extra capital will be available in exchange for preference shares.
  •  £100bn will be available in short-term loans from the Bank of England, on top of an existing loan facility worth £100bn.
  • Up to £250bn in loan guarantees will be available at commercial rates to encourage banks to lend to each other.
  • To participate in the scheme, banks will have to sign up to a Financial Services Authority (FSA) agreement on executive pay and dividends.

The UK’s key rates are the lowest in history

In November 2008. the Bank of England’s key rate was reduced by 1.5 percentage points to 3%, the single biggest rate cut in the bank’s modern history. By March 2009 the key rate was down to 0.5%, the lowest rate in the bank’s long history. As of October 2009, the key rate remains unchanged.

From 2002 to 2006, the key rate had fluctuated from 3.5% to 5%. In 2007, the key rate was raised three times by 25 basis points, to reach 5.75% in July 2007.

The UK’s house price boom was powered by rapid mortgage market expansion. Outstanding secured lending volumes rose by more than 10% annually from 2001 to 2007, from 55% of GDP in 2000, to 85% of GDP in 2007. In 2008, outstanding lending growth slowed to 3.2% y-o-y, i.e., to £1.225 trillion (€1.355 trillion), with its ratio to GDP remaining at 85%.

Yet borrowers pay high interest rates

Fixed rate mortgages (FRMs) with a loan-to-value ratio (LTV) of 75% are now the most common type of mortgage in the UK, accounting for 78% of new mortgages in August 2009, according to the Council of Mortgage Lenders (CML).

Except for standard variable-rate (SVR) mortgages, interest rates on housing loans were between 5.5% and 6.5% between 2007 and 2008. Mortgage rates then started to inch downward in mid-2008, but have not fully followed key rates down. The spread between the key rate and the average mortgage rate has widened to around 3 – 5 percentage points, from less than one percent in 2006 – 2008.  Particularly notable is the widening spread differential between 2-year FRMs (4.46%), and the 10-year FRMs (6.28%), showing that banks do not expect low interest rates to last.

In September 2009, average interest rates for other type of mortgages with 75% LTV were:

  • 3.22% for discounted rate mortgages
  • 3.85% for tracker mortgages
  • 3.93% for SVR mortgages

Fixed-rate mortgages are preferred, as offering security

Households buy FRMs mainly because they offer security against interest rate hikes. Since April 2005, the proportion of FRMs has always been around 50% or above.  84% if new mortgage loans taken out in July 2009 were FRMs, according to the September 2009 “Trends in Lending” Bank of England study.  Meanwhile tracker loans accounted for 12% of loans, SVRs 2.5%, and discounted rate mortgages 1.6%.

In Q3 2009, new gross mortgage lending reached £38.9 billion (€43 billion), up 18% on the previous quarter. Although the amount of new loans was down 36% compared to the same quarter last year, this was the second consecutive quarter of rising gross lending.

“Affordability clearly remains challenging but there may be some relief for borrowers with expectations of an interest rate cut, perhaps as early as November,” says Michael Coogan, CML Director General.

UK rental yields are up, except in London

Immigration has played a big role in the demand for housing over the past decade. Immigrants rent 20% of Association of Residential Letting Agents (ARLA) members’ properties. More than 16% of these tenants are from the European Union.

Meanwhile public anxiety over the (already high) level of immigration is rising, and the government is being forced to be more restrictive, which is likely to impact the housing market.  But foreign workers are needed for the Olympic construction projects. Olympic-related activities will likely also accelerate demand for foreign workers in hotels, restaurants, and tourism.

After the economic crisis, ARLA members reported a remarkable decline in tenants in late 2008 to early 2009. In Q2 2009, the residential rental market started to stabilize, and the oversupply started to ease, with an increase seen in the number of tenants.

Although residential rents have declined as a result of the crisis, they have performed better than house prices. This has led to healthy yields, despite the recession.

Rental yields for all properties in the UK rose to 5.11% in Q3 2009, higher than in the previous quarter (5.07%) and higher than the same period in 2008 (4.89%).

In Q3 2009, rental yields were highest in the North West at 6.5%, followed by the combined area of Scotland, Wales and Northern Ireland (5.8%) and the “Rest of the South East” (5.25%).

London was an exception. Prime Central London gross yields dropped to 4.38%, from the recent peak of 5.25% in Q1 2008. For the rest of London, yields fell to 4.94%, from the peak of 6.05% in Q4 2004.

The June 2009 Global Property Guide rental yields study confirms this picture. Gross rental yields on flats in Prime Central London ranged from 2.9% to 4.5% with smaller units earning the highest returns. For other luxurious areas in London, the

Global Property Guide found gross yields ranging from 4% to 5.3%.

Most British city centers have seen a rapid expansion in the supply of new apartments, many of which have been bought by investors. Yet despite the high media profile of buy-to-lets, the private rentals sector is still quite small, and has remained stable over the last decade, at around 12% of all housing units. The combined share of social landlords (8%) and local authorities (10%) was larger at 20% of dwelling stock. Owner-occupancy was at 70%.

In London, the rental market is larger, with owner-occupancy only at 57% in 2007. Nevertheless, the private rental market, at 20% of housing stock, is smaller than the social rental sector, at 23% of stock (social landlords 9%, local authorities 14%).

The UK’s housing shortage is worsening

UK house-building has largely failed to respond to booming house prices during the past decade, largely because of building regulations.  Increases in population, immigration, and changes in household sizes have all added to the pressure.

In a discussion paper published in September 2009 by the Town and Country Planning Association (TCPA), researchers warned that at least 250,000 new homes must be built annually to match population growth, to replace the aging housing stock and the accumulated backlog. Their analysis shows that the housing deficit may reach one million by the end of 2010.

Yet homebuilding stagnated at an average of 186,000 new units annually between 1991 and 2003.  From 2004 onwards, new homes built exceeded 200,000 annually (222,490 in 2007), but this is still low compared to more than 300,000 annually in the 1960s and 1970s.

In 2008, the credit crunch combined with falling house prices reduced house building, and less than 100,000 completions are forecast for 2009.

Over the past five years, planning policy has swung towards emphasizing the development of high-density housing on brownfield land. Over the past five years, apartment completions have grown from just 15% of annual completions to almost 45%.

2012 London Olympics may help UK economy

Hope for Britain’s economic recovery lies partly in massive infrastructure projects for the 2012 London Olympics.  Total spending is estimated to be around £9.3 (US$13.8) billion.

However, the organizers stress that this will be nothing like the flamboyant US$42 billion 2008 Beijing Olympics, and promise that there will be no white elephants left after the event.

There will be two major beneficiaries of the 2012 games:

  • London’s crumbling mass transport system;
  • East London, where the Olympic Stadium, the Olympic Village and other major facilities will be located.

To accommodate the massive numbers of people moving across the city, major improvements to the transport system include the expansion of London Underground’s East London Line, upgrades to the Docklands Light Railway and the North London Line, and the new “Javelin” high-speed rail service.

East London was the site of the city’s early industrial development. As the economy shifted to more service-oriented industries, it became one of the city’s poorest areas. The Olympic Delivery Authority has allotted £3.1bn for the construction of the Olympic Park and venues and £1.7bn for regeneration and infrastructure.  The budget includes £1 (US$1.5) billion for the Olympic Village, and £400 million for the media center.

Economists unanimous:  rising house prices a ‘false dawn’

The price increases in 2009 have surprised economist and pundits.  Most believe they will not last.  In a report published by the Ernst & Young ITEM Club in September 2009, economists warn that the “rise in house prices seen in recent months is a false dawn and prices are likely to fall again in the first half of 2010.”

They argued that the “the recent stabilization in prices largely reflects an acute shortage of available properties… A small number of cash-rich buyers have supported prices, but the supply of these funds is limited so prices are likely to dip again in the first half of next year. A lasting recovery in house prices would only be possible if there is a sustained pickup in demand.”

The gloomy scenario is affirmed by other housing market players:

  • Jones Lang LaSalle: prices will fall 7% in 2010
  • National Housing Federation: House prices will fall by 12.2% in 2009, by 4.6% in 2010. They will stabilize in 2011 with 1.1% increase in house price
  • Cluttons:  UK house prices will fall by 9% in 2009, and by 1.5% in 2010. House prices in Central London will recover more quickly due to faster economic growth in the capital.
  • Capital Economics:  house prices will fall by 10% in 2010, and by 5% in 2011.

Although the economy is expected to contract by 4.4% for the entire 2009, GDP growth is expected to be positive during the fourth quarter of the year.  As the housing market and financial system stabilize, consumer and investor confidence will rise, while the weak pound is expected to boost net exports.  Despite this, GDP growth in 2010 is widely expected to be low, at 1%.  Not a happy picture, with an unemployment rate already at 7.9% in August 2009, up from 5.2% in May 2008.

This article has been republished from Global Property Guide. You can also view this article at
Global Property Guide, an international real estate analysis site.


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