UK housing market flashing amber

The July RICS survey continued the worrying trend of weaker UK data that has been in evidence since the preliminary UK Q2 GDP data release on July 23rd.  It seems that the economic slowdown that has been evident in the US in the past few months is no longer contained to the US alone. The survey showed that UK surveyors are on balance seeing house price falls rather than rises, the first time this has been the case since July 2009, and signs of both weakening demand and greater supply meant that future price expectations turned more negative.

We’ve focused on the UK and US housing markets on this blog a lot over the years, and forward looking indicators such as sales/stocks ratios or mortgage approvals played a primary role in shaping our exceptionally gloomy view on the UK and US housing markets (and hence financial markets) in 2008.  The correlations between the variables has changed, as correlations always do, but you can definitely get a feel for which way the UK housing market is headed by eyeballing this updated chart, which plots UK house prices against the RICS sales/stocks ratio (ie the number of sales that estate agents have made over a rolling 3 months divided by the total number of properties that estate agents have on their books).  A low ratio implies a glut of supply and/or poor demand, while a high number suggests houses are flying off estate agents’ books.

The RICS sales/stocks ratio doesn’t suggest that the UK housing market is about to fall off a cliff, but it does suggest that the short term outlook is for flat or slightly negative prices.  This isn’t necessarily surprising considering that UK house prices moved sideways in the aftermath of the last housing crash in 1993-1995.  But the concern is that the enormous monetary and fiscal stimulus of the past two years has only served to temporarily halt the decline in house prices, and house prices in the UK in particular still look very overvalued relative to average earnings.  Another leg of house price declines will place significant strain on the already vulnerable banking sector, which would leave us looking more and more like Japan.

Returning to the recent trends in global economic data, some of the US slowdown may simply be because the economic benefit of the huge monetary stimulus at the end of 2008 has now worked its way out of the system (monetary policy operates with about an 18 month lag, as suggested in last week’s blog).  The Bank of England didn’t move quite as rapidly as the Fed, with the final rate cut taking place in March 2009.  The UK is only now starting to face a slowdown, which will likely be highlighted in the Bank of England’s quarterly inflation report released tomorrow.  European data remains remarkably strong, although this may be partly because the ECB was slower and less forceful in implementing monetary policy (the final rate cut didn’t occur until May 2009).  There have of course been numerous additional monetary and fiscal responses around the world since May of last year, but the beneficial effect of the ECB’s rate cuts will cease to be felt over the next few months and I’d expect European economic data to begin to weaken.

Discuss Article

  1. Anonymous says:

    Can we please, please get some balanced reporting on this subject? A reduction in house prices is fantastic news for those who have been priced out through the current bubble. Think too of the over 50s, who then have more finances available rather than having to give them to their children to put down ludicrous deposits. Lower house prices also means lower mortgages, so more disposable income to help fuel a recovery. Where is the bad news in all of this? We need to lose the mentality that further inflating the housing bubble is 'good news' while a return toward historical price trends is some kind of national disaster. 

    Posted on: 11/08/10 | 12:00 am
  2. Anonymous says:

    Being devils advocate to that comment – perhaps what we need to lose is the concept that home ownership is such a necessity ? That said there is a lot to be said for low rates just moving price bubbles from one asset class to the next (govvy bonds now then commodities then ..)

    Posted on: 12/08/10 | 12:00 am
  3. Longodds says:


    Couldn't agree more with what you write. I despair when I hear the BBC news or Economics team talk about “good news” when house prices are rising and the apparent disaster about to befall us when they report house prices flat or,heaven forbid falling.
    I had hoped that the recent fall in house prices in the USA would have done something here in the UK to alter once and for all this entrenched mindset of house prices rising = good news and vice versa but it seems not.

    As a homeowner,now with no mortgage, who has benefited from the crazy rise in house prices over the last few decades I would gladly see the paper value of my property drop if it meant my sons, daughter and others of their generation could then afford to buy decent homes at reasonable prices.

    I think we are on the cusp of a second decline in house prices here in the UK and I for one will be cheering if it happens – 20+% lower would be getting back to more sensible levels.

    Posted on: 12/08/10 | 12:00 am
  4. Anonymous says:

    When I sold my newly renovated house in December, it had been on the market for nearly two years and had lost £50k of value compared to when it was first marketed, and I use the word `value` because my house was only worth what others were prepared to pay for it.  I have now bought a property near the Suffolk Coast, and was able to buy it for a reasonable sum because it was a probate property and the legatee wanted his money ASAP.  I have noticed that many vendors in that particular area are in denial of the true value of their property: the result is that their houses don`t sell and the market doesn`t move.  We must stop thinking of the housing market as one of the prime economic indicators and get back to the old-fashioned idea that a house is a home.  Let house prices fall and don`t complain when they do, and more people will be able to buy a home of their own.

    Posted on: 15/08/10 | 12:00 am
  5. Pete says:

    Expect things to be the same for another 5 years or so. We could only hope that things will be easier and better everyday. Thanks. By the way, do you need cash fast through selling your house in Nottingham United Kingdom? Your search is over because I found the best people in the housing business who can help you. Good luck!

    Posted on: 19/08/10 | 12:00 am
  6. Anonymous, uk says:

    Housing – oh, such a favourite topic in the UK, and at times almost a religion.

    'Sensible' property price inflation is an important ingredient in the economy. Unfortunately, for a very long time, it has been allowed by the 'authorities' to have undue influence on the economic, (and social) outlook. Of course many citizens joined the party or felt obliged to turn up.

    Consequently, with the various the factors, massive credit, irresponsible joint and multiplier (4x, 5x 7x !) salary mortgages, adding in bonuses… (a bit greedy, do you think? ) – many people, in reality, have vastly overpaid for their investment, …sorry…, home.

    That was an artificially created credit bubble-party. But the balloon has a leak. Too late, you've already drank the bubbly, and the bill is in the post.

    So back, slowly-ish, we hope, to the actual economy, based on real economic production rather than shuffling property between ever-increasing bank-loans, which incidentally the young and not-so-young can no longer afford:

    '…and house prices in the UK in particular still look very overvalued relative to average earnings…'             Yes, exactly:  earnings =<£25000, x 3 = £75,000  A 1-bed flat, in excess of £100,000 in a small city.

    We all like to make some profit, but the strategy over the past 20 years has changed us into a nation of property speculators, deep in debt, with less time for relaxed living and family life. Did you (youngsters!) know, about 20+ years ago, it was common to buy a home on one 'reasonable' wage? It is absolutely ridiculous, now two wages are often required. You still only get 1 home.

    Yes, truly 'slaves to the mortgage' in the manufactured property-empire.


    Posted on: 23/08/10 | 12:00 am
  7. Anonymous says:

    You guys! Property is not going up or down. The value of printed cash has been falling and taxes rising through fiscal drag for years – its an illusion. I would like to see a chart showing how much the purchasing power of the money in your bank / pocket has declined due to the printing press over the same period! Get tangible assets (anything that people need that cannot easily be manufactured – gold, land, oil). If you need a clue about how we are being robbed by inflation look at gold v pound / usd (and check out Bob Chapman)! For now, I am still in property.

    Posted on: 10/10/10 | 12:00 am
  8. Croydons Favourite Estate Agent says:

    I have gone through your blogs and i feel you have a very good knowledge about real estate sector.

    Posted on: 17/11/10 | 12:00 am

Leave a comment

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.