UK Home Sales Still Struggling in February; Early Rate Rise Threatens Price Recovery

---

According to Chesterton Humberts-CEBR February House Price Poll of Polls, house prices decline by a further -0.5% in February. House prices have now fallen for six consecutive months as confidence in the speed of the wider economic recovery struggles to rise and transactions levels continue to slide.

House prices in England and Wales are now -1.1% lower than they were at the same time a year before. The typical price of a house in England and Wales stood at £175,518 in February 2011 compared to £177,554 in February 2010. House prices are now lower than at any time since December 2009.

Report Highlights
 

• House prices declined by a further - 0.5% in February. Prices are now -1.1% lower than they were in February 2010

• An early interest rate rise appears increasingly likely but will have negative implications for the house price recovery

• House prices are now lower compared to the same time last year, in all but two parts of the United Kingdom (London and Scotland)

The UK housing market suffered another setback at the beginning of 2011. Data from the Council of Mortgage Lenders (CML) showed a 26% fall in the number of new home loans in January as compared with December. Bad weather and seasonal variation were widely blamed for the fall, which saw the lowest level of new advances since the height of the financial crisis in 2008.

However, the CML data did include some encouraging signs, including a rise in the average loan-to-value offered to first-time buyers, which suggests the supply of credit is becoming less constrained. At the same time, the Monetary Policy Committee (MPC) is becoming increasingly split about the future direction of interest rates as inflation runs at double the Bank of England's target.

For the first time so far in 2011, the number of house price and asking price indices tracked by the Chesterton Humberts' House Price Poll of Polls showing monthly price increases outweighs the number of indices showing monthly price falls.

Nevertheless, taking into account the timeliness, lag and accuracy of the various indices, the Poll of Polls shows that the average price of a residential property in England and Wales still declined by -0.5% over the month to February. This was a slightly worse decline compared to the fall seen over the month to January.

Chesterton Humberts' CEO Robert Bartlett commented, "Although the London market has experienced a month-on-month price decrease of -0.3%, this is not unusual for this time of year and there are signs we may experience a spring bounce over the next few months. Currently, prime and near-prime areas such as Mayfair and Fulham have high levels of activity, with increases in both asking and agreed prices, the results of which will be translated into the spring and summer house price surveys.

"Prices in London are still 2.2% higher than they were a year earlier thanks to an impressive performance for most of 2010.

"With most regions of the UK experiencing a year on year decrease on prices, and reports on the impending rise in interest rates, the market outside of London remains more challenging. The level of demand remains low, making it unlikely prices will rise anytime soon.  Stock shortages have now spread from the South and South West to the Midlands, but buyers will not pay over the odds meaning overvalued properties are sticking and stalling the market. Once vendors are prepared to price properties realistically, the market there will begin to pick up.

"There is much talk in the market about a possible rise in interest rates.  However, most inflationary factors currently affecting the UK are beyond the scope of the Bank of England to resolve and therefore I would challenge that a rise in the UK base rate would have little impact on curbing inflation. However, a rate rise is bound to have a negative impact on the fragile economic recovery and would seriously impact consumer spending, the retail sector, the housing market and cause Sterling to rise thus affecting exports, the one area of our economy which is currently driving growth."

CEBR's Chief Executive Douglas McWilliams also commented, "It is becoming increasingly likely that the Bank of England will raise rates sooner than we would have hoped given the fragility of the economic recovery and the recent slump in house prices.

"If rates do rise, although one should not exaggerate their impact, it confirms our view that the economy in 2011 and early 2012 is likely to be weak. This could offset much of the good from the fall in mortgage interest rate spreads and the relaxation of lending terms which we expect to see during 2011."

---