Signs of a turn in the UK housing market?

The summer produced a run of subdued housing market data. Mortgage approvals for home purchases are running about 8% below the six-month average and house price growth has slowly ebbed away.

More timely indicators suggest this could mark the bottom. The RICS Residential Market Survey, published yesterday, produced less negative readings for buyer enquiries, agreed sales, and metrics covering expectations of sales and housing price growth. This builds on recent Zoopla data showing a sizeable increase in home searches. 

New buyer enquiries rose to a net balance of -19%, the least negative reading since January. Agreed sales climbed to -17%, the least negative reading since February. Sales expectations climbed to -3%, suggesting a broadly stable outlook. A net balance of +6% expect sales volumes to increase over the next twelve months. The data suggests the flow of new listings has been broadly flat over the summer, but new appraisals registered a net balance of -17%. Comments from surveyors at the back of the report suggest this is at least partly due to uncertainty over the upcoming budget. 

The limits of affordability

I talked on Wednesday about distortions in prime London rental markets caused in part by the Renters' Rights Act. The RICS survey paints a similar picture on a national level: a net balance of +18% reported an increase in demand from tenants, but the metric covering landlord instructions remains deeply negative at -14%. 

That suggests supply continues to contract, which is fuelling rental growth. A net balance of +44% expect rents to climb in the coming months, up from +33% last month. Respondents expect rents to climb an average 3% by this time next year – that's a relatively modest figure given the imbalance between supply and demand, but in many areas growth is beginning to hit the limits of affordability. 

The UK's stock of rental homes has fallen by about a quarter since the pandemic, according to Zoopla. If the government wants to tackle affordability in the sector it will need to incentivise landlords at some point, whether through reduced taxation or red tape. 

Second-round effects

When the Middle East conflict began, central bankers and economists across major economies warned that the energy shock would ripple through markets, prompting a temporary spike in inflation that would delay long-expected rate cuts. That looks to have been too optimistic.

The latest round of strikes in the region, which has pushed oil to US$107 a barrel, has coincided with a period of surprising economic resilience. Policymakers in Europe, the UK and the US are increasingly concerned, albeit to differing degrees, that elevated energy prices will feed into wage and price-setting, prompting second-round inflationary effects that require higher interest rates to contain.

The European Central Bank now expects inflation to average 2.5% next year. Yesterday, policymakers voted to raise the key rate to 2.5%, and upgraded the Eurozone economic growth forecast to 0.9% this year and 1.4% in 2027. Similarly, US data showed producer prices surged 5.4% in the year through August as economic growth continues to defy expectations of a meaningful slowdown. The US economy added 162,000 jobs in August, smashing economists' expectations of 55,000. Markets now put a 70% probability of a hike at the September meeting next week. 

Mortgage rates are rising steadily. The average 30-year fixed rate mortgage in the US is creeping closer to 7%, hitting 6.76% this week, the highest since June of last year. 

In other news...

First-time buyers load up on mortgage debt after change in lending rules (FT).