Oliver Knight

What is happening in the housing market? Let’s take a closer look

What is happening in the housing market? Let's take a closer look
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Dinner table conversations these days prove that you don’t have to be an estate agent or work in the property industry to have a view on the UK housing market.

Just a look at the headlines and stories on housing which appear in the media every week is further proof of the country’s interest in all things bricks and mortar.

But in the media it’s more likely to be agents or industry specialists giving their view, rather than homeowners or renters in specific parts of the country. Yet the sentiment of homeowners and renters plays an important role when it comes to the housing market - not least in determining decisions about whether to buy or sell a home, whether to upsize, downsize or just move to a different area. This is especially true among discretionary buyers, those who are not motivated by necessity.

So every month we at Knight Frank, alongside IHS Markit Economics, ask households – those who own their home outright, who are repaying a mortgage, who are renting and even those living at home rent-free - about their opinion on the value of the property in which they live. We also ask what they expect to happen to the value of their home over the next year.

This data is crunched down into an index – the current house price sentiment index (HPSI) and the future HPSI – which give an indication of sentiment around current house prices and future prices. To briefly explain how it works before diving into the figures, any reading over 50 on this index indicates rising prices, while any reading below 50 indicates falling prices. A higher number represents a greater perceived rate of growth.

So, what is the index, which you can read in full here, telling us at the moment?

Well, in February, the sentiment index has risen to the highest level seen since the Brexit vote in summer last year.

The reading for the current HPSI (what’s happened to prices over the last month) was 57.5, a jump from 55.8 in January, while the future HPSI (measuring what households think will happen to the value of their home over the next 12 months) was even stronger at 67.5 from 65.5 the previous month.

So households think that prices are still rising, and at a faster pace than the previous month. However, as with any statistics, context is key here. As can be seen in the chart below, while households perceive prices are rising nationally, both the current and future HPSI remain below the levels they were consistently achieving prior to the EU Referendum.

So why is this happening?

Simply put, the ‘economic dust’ has settled a bit. Earlier this month the Bank of England reversed some of sharp downward revisions it made to its economic forecasts after the Brexit vote. This means that the Central Bank’s central forecast for the UK economy is looking stronger than many other G7 countries.

As well as renewed economic confidence in the short-term, mortgage rates are still near record lows. For those who have access to a deposit, monthly home loan repayments have never been lower. A shortage of housing for sale is also underpinning pricing in the market.

The Brexit ‘bounce-back’ is a trend which has also been mirrored in the latest survey from the Royal Institution of Chartered Surveyors (RICS) – which canvasses the opinions of estate agents across the UK.

But while any Brexit-related anxieties may be receding, there remains a sizeable list of factors likely to weigh on price momentum during the year ahead, as we examined recently in our UK forecasts.

Affordability constraints are becoming a pinch point in some areas of the housing market. In addition, while inflation remains low by historic standards, living costs are starting to rise.

We monitor the housing market and the economy closely – and the sentiment index continues to be a good indicator of what households across the UK think about both. Usefully for us, the index is also a very effective bellwether for the movement in house prices across the country.

Oliver Knight is an Associate Partner at Knight Frank Residential Research