HBOS Economic Forecast Update for 2005 - 26/07/05
- We continue to forecast a 2% fall in UK house prices in 2005. The average UK house price was static over the first six months of 2005 as a whole, with the annual rate of house price inflation falling from 15.1% at the end of 2004 to 3.7% in June, the lowest since March 2001.
- Housing affordability is good. Interest rates remain low. Mortgage payments account for the 20% of the gross income of the average new buyer: just above the 19% average for the past 20 years and well below the 34% peak in 1990.
- The decline in the number of first-time buyers may have bottomed out. There were 361,000 FTBs in 2004 according to the Council of Mortgage Lenders (CML) - the lowest annual total in the past 20 years. This downward trend has continued with 29% fewer FTBs in the first six months of 2005 than in the same period last year. This fall in FTBs, however, has been slightly less than the overall decline in housing market activity. As a result, the proportion of the market accounted for by first-time buyers has risen slightly from 29% in the first six months of 2004 to 30% in the same period this year.
- Housing transactions are forecast to be more than 20% lower than in 2004. We predict that property transactions in England and Wales will fall from 1.79 million in 2004 to 1.4 million in 2005, with this decline largely reflecting the fall in transactions in the first half of the year. The market is now stabilising following the sharp decline in the second half of 2004, with some signs of steady improvement in recent months. The number of loans approved for house purchase increased for the fifth successive month in May, according to the latest Bank of England figures. There were 96,000 loans in May (seasonally adjusted): 25% higher than last November's low of 77,000, but still 21% lower than in May 2004. Halifax Estate Agents has also seen a steady level of sales since February.
- House prices across the country are trading within a narrower band than before. The regional pattern in the first half of the year has been broadly in line with our expectations, so we are just making a small number of adjustments to the forecasts we published at the end of last year.
- Scotland (10%), Nothern Ireland (10%) and Wales (9%) are expected to record the strongest house price gains in 2005. Yorkshire and Humber (3%), North West (1%) and East Midlands (1%) are all expected to record small price rises. Price falls are expected in East Anglia (-6%), the South East (-4%), London (-4%), the North (-3%) and the South West (-2%). These modest falls should however, be viewed in the context of the substantial house price rises in all these regions over the past 10 years. For example, prices have risen by 207% in London, 180% in the South East and 174% in East Anglia since 1995 Quarter 2.
- The north south house price divide will narrow further. We expect a further modest reduction in the north/south divide with average house prices in the south 1.6 times as high as in the north at the end of 2005, compared with 1.7 times higher at the end of 2004. This reduction follows a rapid decline from 2.1 to 1.7 during 2003 and 2004. On a longer historical perspective, the north/south divide is set to remain wider than it was ten years ago (1.4 in 1995 Quarter 4).
Regional House Price Growth
|2004 % Change||2004 H1 % Change||2005 H1 % Change||2005 Forecast % Change|
|Yorks & the Humber||22||15||3||3|
(source: Halifax House Price Index)
- Earnings growth remains robust. Average earnings are expected to increase by 4.5% in 2005 compared with 3.8% in 2004, reflecting the overall strength of the labour market. This acceleration in earnings growth is predicted to contribut to a pick-up in 'real' households' disposable income growth (i.e. after-tax and following adjustment for retail price inflation) from 1.9% in 2004 to around 2.5% this year.
- Housing equity is mat a record high. The rapid rise in house prices over the past few years has resulted in a substantial increase in the amount of housing equity held by homeowners. The value of households' net housing equity (i.e follwing the deduction of mortgage debt) has almost doubled over the past five years, increasing from £1,255 billion at the end of 1999 to £2,429 billion at the end of 2004.
- Buyers have been putting down bigger deposits than in previous cycles. 81% of all new borrowers took out a mortgage of less than 90% of the house price during 2004, according to the CML. This was significantly higher than in 1989 and 1990 when 56% of new borrowers took out a mortgage of less than 90% of the house price.
- Home-ownership rates among more financially vulnerable young households have declined. Recent CML figures show tha only 22#% of under 25 year olds were homeowners in 2003 compared with 34% in 1985. Similarly, home-ownership among 25-29 year olds has fallen from 62% to 52% since 1985.
- Arrears and possessions are likely to remain low. The number of proerties taken into possession i 2004 was 6,230: less than one-tenth of the total in 1991 (75,540) and the lowest since 1982. Short-term arrears of 3-6 months showed their first material increase since 1998 in the second half of 2004, although the level remains extremely low by historical standards. In line with the industry, nevertheless, we expect a modest rise in arrears and possessions during 2005.
- The UK economy is forecast to grow by 2.1% in 2005. We have revised down our forecast from 2.5% to reflect the ONs' recent significant downward revisions to economic growth over the past year with annual GDP growth in 2005 Quarter 1, for example, revised down from 2.7% to 2.1%, and annual growth of 1.7% in Quarter 2. The UK economy, however, is expected to expand at around twice the pace of the euro area this year.
- Consumer spending growth has slowed in 2005, partly in response to the slowdown in the housing market. As a result, we expect growth in 2005 of around 2.0% compared with 3.7% in 2004. Manufacturers' difficulties have also adversely affected the UK's trade performance with a decline in exports of goods and services in 2005 Quarter 1.
- The saving ratio is expected to increase from 4.2% in 2004 to 5.1% in 2005 as spending rises more slowly than income growth this year. Despite this increase, the saving ratio is set to remain well below the 7.9% average over the past 40 years.
- Base rates will fall to 4.25% by the end of 2005. We expect the recent signs of a slowdown in consumer spending growth to be confirmed in the coming months. We expect the Bank of England to cut rates, with the first reduction likely in the next few months. A further reduction is expected later in the year with base rates predicted to end 2005 at 4.25%.
Martin Ellis, Chief Economist, commented:
"The UK housing market is on course for a gentle slowdown. We continue to expect a 2% fall in house prices this year nationally. This slight decline should be set against nine consecutive years of rising prices, during which the average home in the UK increased in value from £61,564 to £162,850."
How to get further informationFurther details about this research can be obtained from HBOS.