The EY ITEM Club, regarded as one of the most influential groups of economists in the UK, says it’s still “dubious” about the housing market improving this year despite recent upbeat figures.
Earlier this week the Halifax reported that house prices rose a much stronger than expected 1.4 per cent in July, taking the annual increase to 3.3 per cent. The EY ITEM Club admits that alongside this there was good news on mortgage approvals for house purchases, which rose to a five-month high in June.
However, the club says in a statement, ”we remain dubious that the housing market is seeing a sustainable shifting up of a gear and the Bank of England raising interest rates last week will not help it.”
It says house price gains over 2018 will be limited to around 2.5 per cent with a slightly larger 3.0 per cent anticipated in 2019.
“Housing market activity is still relatively lacklustre and we expect it to remain so as the extended squeeze on consumer purchasing power only gradually eases, consumer confidence is relatively fragile and appreciable caution persists over engaging in major transactions. Potential house buyers may also be concerned that they are likely to face further interest rate hikes over the medium term following August’s hike” says the statement.
The economists argue that house prices remain relatively expensive relative to incomes with the Halifax house price to earnings ratio rising to 5.72 in July, which was the highest ratio since December 2016 and well above the 25 year average of 4.25.
“There have recent been significant monthly variations in the house price data from Halifax and Nationwide, with Nationwide reporting much smaller monthly movements” notes Howard Archer, chief economic advisor to the EY ITEM Club.
“While housing market activity has recently climbed off its 2018 lows, it is still relatively lacklustre. Latest data from the Bank of England show that mortgage approvals for house purchases rose modestly to a five-month high of 65,619 in June from 64,684 in May and a 2018 low of 63,014 in April (which had also been the second lowest level after December 2017 since August 2016). Mortgage approvals had previously weakened to April’s low from 67,156 in January” adds Archer.
“The impression remains that the housing market is struggling to really step up a gear in the face of still limited consumer purchasing power, fragile confidence and expectations of the Bank of England edging up interest rates. There seems little evidence that the cutting of stamp duty for first-time buyers in last November’s budget has provided a significant boost to housing market activity.”
He concludes by saying that the abolition of stamp duty for first time buyers for properties costing up to £300,000 - and on the first £300,000 for properties costing up to £500,000 - in last November’s budget may provide some limited support to housing market activity and prices.
But, insists Archer, “even if ultimately successful, the Chancellor’s measures to boost house building in last November’s budget will take time to have a significant effect so are unlikely to markedly influence house prices in the near term at least.”