United Kingdom Home Prices Diverging at Top, Bottom of Pricing Ladder

United Kingdom Home Prices Diverging at Top, Bottom of Pricing Ladder

Residential News » Residential Real Estate Edition | By Michael Gerrity | April 13, 2011 2:39 PM ET

Based on Chesterton Humberts/cebr March 2011 House Price Poll of Polls, there is now a divergence at top and bottom end of the house prices ladder.

Report Highlights Include:

  • House prices of the top 20% and the bottom 20% continue to diverge. The fifth most expensive areas increased 3.4% over the year, whilst the cheapest fifth declined by -5.1%.
  • To put the fall of the bottom fifth in context, house prices in Spain have fallen by -1.9% over the year to Q4 2010.
  • In comparison, the return offered by the most expensive property is competitive with having an ISA and the current yield on a 10 year government bond.

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 continues to decline, falling by -0.6% over the month to March. This was a similar pace of decline to that seen over the month to February.

House prices in England and Wales are now -1.9% lower than they were at the same time a year before, marking the tenth month in a row, that has seen the annual percentage change in prices fall. House prices are -11.1% below the level when house prices peaked in February 2008, meaning that in little over two years £21,698 has been wiped from the typical value of a house in England and Wales.

The housing market downturn does appear to have stabilized, with falls in recent months being not as steep as those seen towards the end of 2010 and the number of national house price indices reporting falls now evenly balanced with the number reporting price increases. But this month's Poll of Polls does show a further monthly downturn - the sixth in seven months.

Looking at a more detailed picture of house prices reveals that 68.4% of all local authorities in the United Kingdom experienced price declines over the month to March and 67.3% have seen year-on-year falls.

Robert Bartlett, Chesterton Humberts' CEO, commented, "The increasing disparity between property at the top and bottom ends of the market reflects the divide between property prices in London and the South East and the rest of the country.  Until the effects of economic recovery filter further out into the country, we will continue to suffer from the effects of this stagnant, disparate market."

However, once again, we see a disparity between price movements at the top and bottom of the property market. The top 20% of property areas ordered by value actually saw a small price rise of 0.1% over the month to March, while the 20% of cheapest housing areas saw prices fall by an average of -0.6%. This difference in growth rate is even starker when viewed as an annual change. The most expensive 20% have seen prices rise by 3.4% over the last year, while the bottom fifth have experienced a massive price fall of -5.1%.

The scenario described above is also demonstrated by the chart below. The five most expensive property areas in the United Kingdom saw their prices increase by an average of 0.5% over the month to March. However, the five least expensive local authorities saw price declines of -0.5%.

There has been slightly better news emanating from the housing market over the last month. The Bank of England reported that the number of mortgage approvals rose to 46,967 in February, the highest level since November 2010. This was a greater than the expected increase and was in line with the experience of a number of sellers who have reported increased viewings and enquiries over the last few months.

However, seeing this modest increase in activity translate into an immediate increase in house prices is unlikely. Mortgage approvals are still running at around half their long-run average and we expect the housing market to remain subdued for the rest of the year.

Bartlett further commented, "However, the current course for economic reform does seem to be slowly mending the fractured UK economy, but it will clearly remain a long and difficult path. Yesterday's inflation figures are a welcome signal that the Bank of England's policy to keep interest rates on hold and at such low rates is correct. It will be vital to any economic recovery in the UK that rates remain low, especially in light of the poorer retail figures.

Mortgage availability remains the sticking point to kick starting the housing market but there are now clear signs that the banks are opening back up for sensible mortgage lending. Providing rates remain low and the spread between the UK base rate and mortgage rates narrow then we remain optimistic that the second half of 2011 and early 2012 will mark the start of a sustained recovery in house prices."

Douglas McWilliams, Chief Executive of CEBR, also stated, "Household budgets are already being squeezed by high inflation and weak earnings growth. The UK is now seeing a bigger fall in real household disposable incomes than in the 1930s and the biggest fall excluding WW2 and the General Strike since 1921. The downturn in house prices, which continued again this month, has added to the problems faced by consumers and we maintain our cautious outlook for economic growth in 2011."

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