Rising UK property prices do not necessarily mean recovery
Property prices are rising steadily in the UK but this growth alone will not necessarily translate into a real estate recovery, it is claimed. Currently the residential property market is experiencing restricted supply and rising prices. The latest index from the Halifax, published a few days ago, shows that prices increased by 0.6% in June, the fifth month in a row that prices have gone up.
The same index shows that prices are 2.1% higher in the second quarter of 2013 than in the first three months of the year. Also prices in the three months to June were 3.7% higher than in the same three months a year earlier, the biggest increase in this annual measure since August 2010 when it was 4.6%. However, another measure of what is happening in the property market gives a different insight.
To track the rate of flow of stock, Home.co.uk has created the Home Market Turnover Indicator (HMTI), combining monthly data on overall stock levels and average marketing times from 2005 to the present day. The result is a robust view on the volume of property turnover and, ultimately, the health of the property sales marketplace.
During the boom times of 2007, the HMTI was 10,000 properties per day but, when the financial crisis hit, this flow fell drastically. Since early 2010, the HMTI managed to recover to the 4,000 per day level later that year. However, the overall trend over the last three years has been downward as stock levels have fallen faster than marketing times. Currently standing at 2,761 properties a day, the turnover is 14% lower than it was in June 2012.
Quote from PropertyCommunity.com : “Residential rents in the UK grew by just 1.3% in the period May 2012 to May 2013, far below the rate of inflation, according to the latest figures from the Office for National Statistics.”
Despite a seasonal upturn, such a trend questions whether the current price rises are really a sign of a stable recovery in the sales market. In fact, the HMTI is at an all time low for the time of year, indicating that the market in England and Wales has downsized by around 75% since the peak in 2007. The firm says that if stock levels remain restricted, with continued economic uncertainty, and a booming rental sector suggesting that they will then it expects the HMTI to continue its downward trend.
Based on current average prices, at the current low rate of turnover, Home.co.uk estimates that there is £656 million of property value flowing through the market per day. This is completely dwarfed by the turnover in July 2007, the highest recorded HMTI, when close to £2.5 billion moved through the market on a daily basis. ‘Rising property values are less significant if sales activity is stagnant or falling. Hence, it is vital not to overlook the pulse of the sales market. Translating the daily rates of turnover into money flows helps the observer gain a genuine perspective on the health and wealth of the marketplace,’ said Doug Shephard, director at Home.co.uk. ‘To consider that the flow of wealth at the pre-crisis peak was 277% more than today’s rates is very sobering news for any party involved in the buying and selling of residential property,’ he explained.
He also pointed out that it is not just about cash flows between financial institutions. ‘Lower transaction rates have a very negative impact on local economies. Vendors spend money preparing their homes, buyers spend money post-purchase and both sides hire professional services. A US study looking at how much money is injected directly into the economy puts the figure at around 17% of the property value,’ he added.
Looking ahead, Shepherd said that the real test for each local market is when vendors begin to return in significant volume and this very much depends on the fortunes of the wider UK economy.