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COUNTRYWIDE ORD 1P (LSE:CWD)
Viewpoint: Signs of life in the UK housing market
The UK housing market has been at the sharp end of the recession. Prices have fallen by 18% from the August 2007 peak and the number of transactions is running at half the levels seen before the financial crisis. Housebuilding has collapsed. In 2011/12 the number of new homes built fell to the lowest level since 1923.
Yet despite the decline in prices UK housing still looks relatively pricey on a long-term basis. The price of an average house in the UK, at £172,000, is now 4.5 times annual earnings.
In Greater London and the South West the ratio is 5.5. The Economist estimates that nationally UK house prices are 21% overvalued relative to rents and 12% overvalued against incomes.
Some countries have made faster progress in deflating their housing bubbles. In the US, where prices have fallen by 35% from their peaks, the Economist estimates housing is now 7% undervalued against rents and 20% undervalued against incomes. Irish house prices have more than halved from their peaks and the Economist reckons housing there is now slightly undervalued.
UK housing may not be cheap, but the market is showing signs of life.
According to the Halifax, house prices have risen in each of the last three months and are 1.1% higher than a year ago. The Royal Institution of Chartered Surveyors reports that enquiries from new buyers are running at the highest level in three years. The number of mortgage arrears has fallen by a quarter since 2009.
Meanwhile investors see better times ahead for UK housebuilders. Shares in UK housebuilding companies have more than doubled in value since last June. And in a sign of the changing fortunes of the housing market, the estate agent Countrywide (CWD1) listed successfully on 21 March. Last month the Financial Times reported that the private equity owners of Foxtons, BC Partners, had held talks with bankers about a possible initial public offering of the estate agent.
Several factors are contributing to improving sentiment about housing.
Ultra-low interest rates and quantitative easing have dramatically reduced the cost of borrowing. The Bank of England's survey of lenders shows that mortgages became markedly cheaper in the last six months and are expected to become cheaper still in the second quarter of 2013.
Homebuyers are also finding it easier to access credit. The Bank of England reports that mortgage availability improved in the first quarter of this year, with the biggest improvement for borrowers taking out high loan-to-value mortgages. In coming months lenders expect mortgage availability to improve at the fastest rate in three years.
The government has also been trying hard to boost housing activity through a dizzying array of schemes. Funding for Lending, launched last August, aims to increase lending by providing lenders with access to cheap finance.
Help to Buy, announced in last month's Budget, will partially guarantee the mortgages of people with a deposit of between 5% and 20% buying homes costing up to £600,000. The policy will provide up to £12 billion in guarantees, sufficient to cover lenders against a portion of losses on mortgages worth £130 billion.
The Chancellor has also expanded the First Buy scheme, extending eligibility from first-time buyers to all purchasers of new-build homes, enabling them to put down a 5% deposit on a property, far less than is required by most lenders, with the scheme supporting a 20% equity loan.
Yet another scheme, Buy to Rent, was launched in December to provide £200 million of equity and loan finance to help housebuilders realise developments for rent. The March Budget increased funding to £1.0 billion.
Finally, the Budget increased the discount on sales of council houses under the Right to Buy legislation in London from £75,000 to £100,000 and reduced the qualifying period for eligibility.
All this made the Daily Express declare, excitedly, in a headline last month, "Perfect conditions for first time home buyers".
Some worry that this may all stoke a new housing bubble. The Bank of England's new Financial Policy Committee has warned that mortgage lenders are taking an accommodating line with borrowers, allowing them to take payment holidays if they are struggling to keep up with mortgage payments and changing from capital-repayment loans to interest-only loans to reduce monthly costs.
UK housing may not be cheap, but history shows that expensive assets can keep on rising in price. And policymakers are certainly throwing a lot of stimulus in the direct of the UK housing market.
Ian Stewart is chief UK economist at Deloitte.
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