Economic factors for UK house prices based on data entering Q1 of 2018.

The risk of a retrenchment of property prices of up to 15% has increased over the past decade.

Starting with the basic metrics of UK property. This post looks at mortgage approvals, construction orders and property prices. The conclusion is a slowing down of the UK property market. Not included in this post is home ownership which has consistently declined over the past decade from 73% in 2008 to 63% in 2018.

 

United Kingdom Mortgage Approvals

The number of mortgages approved for house purchase in the United Kingdom has taken a moderate downturn into 2018. This is an indicator of a weaker demand or at least lower leverage in the property system.

The above shows a conservative approach to price rises in the sense that there is an aversion to increasing risk in a system that has been fueled by low rates. Whilst negative rates have been observed in other systems (EU government bonds, other sovereign base rates, short dated high quality corporate bonds) it is expected that the UK is pretty much at the floor being close to zero (0.5% at the time of writing).

The UK yield curve remains relatively flat (the 10-year gilt yields 1.62% and a typical mortgage approximately 5% at the time of writing) and any marked increase in mortgage approvals without an increase in base rates or mortgage rates would be seen as a negative to the general property market.

 

United Kingdom Construction New Orders

Whilst mortgage approvals have subdued as per the above, the market has actually  posted an uptick in construction orders. This contradicts the two sets of data as one may expect an increase in orders to be correlated to an increase in mortgage approvals. It is certainly the case that this indicates an increase in supply. Whether this meets demand is another question and will largely be observed in the pricing however, it would be fair to assume that demand has been increasing given a population increase over the same period.

 

 

United Kingdom House Price Index

Finally, lets conclude with the house price index. With Brexit faded (in fact nearly invisible on the chart) the market has remained in bullish phase since 2013 having found a bottom in 2009. Over the past year we observe a slowing of price increases.

 

 

In summary, the market has remained positive carry for 10 years of which 5 of those have been a bull market. The probability of a correction has therefore increased although UK property itself may not be the driving factor. Rental incomes are in line with fixed income which itself is priced of a historically low base rate. Therefore any global de-risking which may lead to a rise in UK rates would adversely affect properties to a much larger degree (estimated at approximately 15%) than would otherwise have been the case.