Halifax House price index
The Halifax House Price Index in the United Kingdom increased 2.7 percent year-on-year in the three months to March 2018, following a 1.8 percent gain in the previous month and easily beating market expectations of 2.1 percent.
Mortgage approvals are down 7 percent compared to 12 months ago, whilst home sales have remained flat in the early months of the year.
Commentary suggests that: “in the coming months home price growth is expected to remain close to 3 percent, despite the very positive factors of continuing low mortgage rates, great affordability levels and a robust labour market”.
Below is plot of the recent data from the Halifax house price index.
As a reminder of where the market is, here is the longer term chart of the same data (Halifax house prices).
Interestingly, we observe that the low mortgage approval rate over the past decade (since the financial crisis) has in-fact been supportive of house prices. Furthermore, one may observationally conclude that there is no long term correlation between the number of mortgage approvals and house prices over the longer term.
External factors
The macro picture:
Since the previous reports, the market has observed the beginnings of a trade war between the US and China. This is so far playing out in taxes on various goods initiated by the USA and retaliated in a similar response from China. This has had an effect on the equity markets which are at historical high multiples and have been quick to reprice albeit not to previous values. Little has been passed over to the UK property market and it is not expected to. If anything, a flight to quality (from equity to other ‘safer’ asset classes) might be expected and this would be supportive.
Fixed income:
Again, this is rather US lead, but the market has seen a further hike in rates from the US with further rate hikes expected to come (as pert he chart below) with the UK at 0.5% and the US at 1.8%.
We expect that, at some point, the UK will increase rates (supported by the same inflation that the US is reacting to) as historically, the is a broad correlation between the two countries. This potentially is the greatest threat to house prices as it would increase mortgage rates adversely for borrowers especially given Households Debt as a percent of gross income in the United Kingdom is at 126%.
Conclusion
As per earlier reports:
The Halifax data is broadly consistent with the nationwide data. The reported supply-demand imbalances remain broadly unchanged with home-builder completions remaining reasonably consistent and the same to be said for mortgage approvals. There appears to be little risk in the short term, but over the medium term there are headwinds for further price increases so LEM expects house price growth to be on the 2 to 3% YoY range until new information enters the system.