Could housing floor the UK?

Monday, February 19

The Royal Institution of Chartered Surveyors (RICS) today says that the number of UK house sales could fall by up to 40% this year.  Residential property affects the stability of financial markets and impacts the real economy via the construction, financial, estate-agency and legal sectors, and through housing-equity financed consumption, all of which are sensitive to housing market slowdown. 

Recently there have been some positive signs in the UK economy.  Moreover, the government and Bank of England (BoE) have intervened to keep the housing market and wider economy on course.  Despite encouraging factors, the housing market appears to be experiencing rapid slowdown. 

Key structural changes in the UK housing system since the last housing slump make the sector vulnerable to further contraction.  'Buy-to-let' (BTL) has proved extremely popular with novice investors as a means of saving for retirement.  Reforms to 'income support for mortgage interest' could make repossession rates more sensitive to labour market contraction. 

There are further upward pressures on repossession: 

• Rising energy and food costs disproportionately affect low-income households.
• There are high levels of unsecured debt. 
• Interest rates on mortgage lending remain high relative to base. 
• Falling house prices may motivate banks to foreclose more quickly. 
• Repossessions have risen since 2004 despite modest increases in unemployment. 

The extent to which the credit crunch and housing market slowdown will feed off each other and exacerbate economic slowdown is unpredictable: 

• Falling house prices reduce consumer confidence. 
• Property-related industries are already starting to feel the effect. 
• The timing of the UK slowdown could be particularly unfortunate if it coincides with a continued rise in input costs, consumer price inflation and government debt. 

While the UK economy remains strong and house price falls are modest, signs are emerging of significant slowdown and pointing to a prolonged period of falling house prices.