You can’t see the wood for the trees
Where is the mortgage market? The past year has been terrible, as everyone knows. Now, though, there are some signs of recovery and matching signs of continuing gloom. For everyone, including seasoned market analysts, the picture is unclear.
We have seen a 75pc drop in mortgage approvals, a 22pc fall in average values from their 2007 peak and there are now record low transaction volumes. But analysts are divided as to whether we have reached the bottom.
The evidence of stabilisation looks convincing. April saw an increase in buyer enquiries for the sixth month running, according to the Royal Institution of Chartered Surveyors. Mortgage approvals climbed to 43,200 in May, the fifth monthly rise in a row, according to the Bank of England. In November they stood at 27,500.
However, data from the past 15-20 years shows that house prices only regain positive momentum when mortgage approvals have exceeded 75,000. This suggests that it would be a massive risk to assume prices are now locked into an upward trajectory.
Similarly, the Nationwide housing index rose 1.2pc during May. The
Halifax index on the other hand shows a monthly change of 2.6%. So are we back in good news territory?
Possibly. Erratic changes of demand in very shaky markets probably explain the inconsistent behaviour of the two main price indices. On a month-on-month basis, Nationwide’s rose in March, fell in April, then climbed again in May.
Halifax’s rose in January, but then fell each month until May. Such instability is a feature of housing downturns. The same thing happened between February and August 1993. But prices did not stabilise until late-1995.
If both indices move upwards together for three consecutive months, then a sustained recovery would almost certainly be underway.
But two things need to happen. Firstly, the macroeconomic environment must stabilise. That itself seems a long way off since unemployment is predicted to rise from its present 7pc to over 10pc before falling again.
Secondly, first-time buyers need improved mortgage terms. Securing a loan over 75pc of the value of a property has become much harder, according to the Bank of England’s Credit Conditions survey. That suggests a £37,000 downpayment on the average property. New mortgage products such as the one discussed here from Lloyds two months ago are going a long way to help on this front but so far it is not enough.
House prices need to fall an enormous 17pc to get back to their long-run average of 3.7 times average income. Such a large drop would also be consistent with the relationship between forecast GDP and last year’s house-price changes.
All of this points to the obvious conclusion that the mortgage market is still subject to immense volatility. Any talk of a ‘floor’ having been reached may be right in general terms but buyers should beware of the ongoing risks.
