Liam Bailey, Head of Residential Research, comments on the current market and outlook for the rest of 2008
Date: April 2008 | 
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Market summary
The UK housing market is experiencing its most significant slowdown since the early 1990s. On almost every measure across the prime and mainstream markets and the new build sector, the market has shown worsening performance over the last six months.
With regional and local market variations, house price growth across the UK has been slowing since September, with prices in April approximately 4% below their Autumn peak. Prices fell 2% during the first quarter of 2008 alone. More noticeable has been the impact of the market slowdown on sales activity, with sales volumes almost 35% below the long term average in the first quarter.
The most significant driver behind weak market conditions has been the continuing fallout from the credit crunch which began last autumn. Access to mortgage finance has been severely restricted, and the cost of finance has risen at the same time, despite cuts to the Bank of England base rate.
Market outlook
Our forecast is based on the assumption that the recent improvements in the commercial money markets will feed through to the mortgage market, and we will begin see more normal conditions emerging during Q2 2008. Even with these improvements there is little hope of rising prices at the current time. We believe that prices will continue slowing during Q2, but that prices will level off in the second half of the year. We also believe there is scope for some limited price growth, during 2009. Overall sales volumes are likely to be at least 30% lower in 2008 compared to their 10 year average.
Our relatively positive outlook for the UK market in terms of pricing, is based on the fact that without sharply rising interest rates or unemployment, there is not yet a large number of forced sellers. However the credit crunch has proved its ability to provide surprises in recent weeks and without a rapid return to more normal lending conditions – the outlook for sale volumes and prices could be decidedly bleak during the remainder of 2008 and into 2009, we could easily see a scenario where sales volumes would fall by more than 40%, and prices by 5% to 10% or more.
Sub-market analysis
New build – There is no doubt that new home volumes will be lower in 2008 compared to 2007, probably around 20% lower overall. Many sites which were planned for development are likely to see delays of some form. Some builders may opt to cut prices to maintain volumes, but most will look at offering incentives rather than see prices fall.
Investment – Growth in the residential investment sector held up well in the final six months of 2007, with a record number of buy-to-let mortgages taken out over the period. The sector now accounts for almost 13% of all housing purchase lending in the UK mortgage market. Gross and net yields have slipped back over recent years as capital price growth outpaced rental growth over time, there will be reversal of this process during 2008 as rents continue to rise, pushed by higher demand, and as capital prices decline.
Prime London – Prices of prime central London residential properties will end the year at least 2% below the level at which they started it. Demand has declined over the first quarter, with prospective purchasers down almost 20%, however this has been matched, especially at the top of the market by a decline in available properties. Despite the downturn being experienced in the City, London will outperform the UK average marginally in 2008.
Prime country houses – Prices for prime country houses have already seen falls over the past six months – our view is that the market ultimately will register a decline of 2% over the year. This market is closely tied to the fortunes of the London market and the two will move closely this year. Prices for the entry level country house market – cottages and smaller houses – will be under most pressure through the year.
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