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Ye cannae change the laws of physics

It is a tedious fact, but the housing market is underpinned by economic fundamentals. This won’t be a surprise. 

However, at a time when, as a nation, we seem willing to de-shackle ourselves from all manner of proven wisdom (and at times decent attitudes towards others) fundamentals are also up for grabs.

The House Price Sentiment Index from Knight Frank and HIS Markit reported households perceive the value of their home rose in September. This reflected the largest month-on-month increase in the index for seven years, although the level remains lower than that recorded prior to the referendum. 

Meanwhile, the latest sentiment survey from RICS (UK Residential Market Survey, October 2016) found that nationally, the majority of surveyors expected house prices to increase over the coming months. This appears counter-intuitive given economic cautions from the Chancellor amongst others.

There is a long-term relationship between house prices and real earnings (earnings growth less inflation) and employment, amongst other things. This means the housing market can be forecast with reasonable success. 

Despite the dismissal of experts as both wrong and biased (or at least when they are not chiming with popular press opinion), house price forecasts for the UK as a whole or even at a regional level, have a pretty good track record of indicating the direction of travel. 

The (pesky) experts expect inflation will rise by around 2.5% next year and perhaps a little more in 2018. Meanwhile, there are expectations of a slowing in GDP and a slight rise in unemployment. Why then are we as a nation so darn positive about the value of our homes?

Today we have record high employment, close to record low inflation and ridiculously low interest rates. But sentiment also plays a role. Sentiment can override fundamentals for a short period at least, which is why actual market movements tend to be more exaggerated than econometric forecasts might indicate.

The referendum result suggests at least 52% of the country feels positive about the future. Long may this last as we navigate the Chancellor’s ‘bumpy road ahead’. However, as an industry we probably need to prepare for said bumps causing havoc on occasions. Sentiment can turn both positive and negative very quickly. 

The coming months will bring further political shenanigans and economic ups and downs. Pre-23rd June who would have thought Marmite would be headline news. We are in strange times and the potential for deal derailment is high. The potential for a change of heart with the next news cycle is equally as high.

Sentiment can, of course, also impact on supply. House price forecasts generally focus on the demand side of the equation. While new homes delivery may impact on prices at the local level, the pitiful scale of the pipeline ensures this has little impact at the national or even regional level. The supply side of the equation is, therefore, largely in existing homeowners’ hands. 

The RICS survey showed that new sales instructions fell again in September, a trend that has largely persisted for the last two years. While affordability issues may have dampened a propensity to move over recent years, there is evidence from post-referendum household sentiment surveys that potential movers are reluctant to make significant financial commitments in an environment with Marmitegate potential. When homeowners sit tight the shortage of stock sustains prices, if not agents.

With both buyers and sellers influenced by the news cycle, which let’s face it, gets more random by the day, it is likely to prove a challenging 12-24 months. 

However, in the end ye cannae change the laws of physics and the economic fundamentals will play out in the market. Inflation and the Bank of England’s interest rate dilemma will be first off the blocks. 

Based on what we know of the economy now, residential values are not, on average, expected to move much over the next couple of years. There is perhaps more downside than upside risk, but if supply fails to materialise, in particular through forced sales, then perhaps not. 

But, what we also know is that we don’t actually know much; about the form of our economic future or indeed many other aspects of our lives. Sentiment will continue to call some of the shots in the housing market for a while longer. This may spur some much needed second-hand market activity. 

This will not of course help to alleviate the housing shortage; although the Chancellor may decide to take this on in his autumn statement. We live in hope...

*Sue Foxley is Research Director of ThinkBarn

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