Sun sets on the UK housing market

Having defied common sense and gravity, the housing market took a strong downward turn this morning. Treated like a fallen-from-grace d-listed celebrity, the headlines have jumped into the discomfort and ‘turned on’ the housing market with a united vitriolic zeal. Whilst its too early to say we told you so, we feel that it has been a long time coming.

According to Rightmove, which measures asking prices not actual selling prices, there has been a drop of 1.6 percent in the asking price of property in the UK from July to August, with the average asking prices dropping £2,500. This is the first fall since December, and the largest drop since November 2004.

As Rightmove records the asking prices it would be a little too soon to predict the demise of the housing market, but the key issue in any market is – sentiment – markets after all are only buoyed up by peoples willingness to pay a particular price for something, if the sentiment moves against the market then prices asked and received will fall.

Pundits are pointing to last months rate rises as being the ‘tipping point’ for the turn, with activity in the market once more again beginning to come to a standstill. As we’ve pointed out in other articles, it looks like there are more increases in rates to come from the Bank of England in the near future. Once a market begins to turn the increase in rates will be like pouring petrol on a fire.

The housing market is unlike the equities market, in that the rate of ‘churn’ is slower, and people tend to sit on a property if they can’t get what they think it’s worth – so it would not be expected to collapse rapidly as the stock markets can and do. However, there are circumstances where the market inertia is governed by external factors and could be driven in either direction more rapidly. In this case the amount of household debt, increases in energy costs and interest rates for the middle classes will conspire to make for a very volatile mixture. In many cases households may have no choice but to sell up to pay off debts.

Last month we saw the largest number of people ever going into buy-to-let market. Any further increases in interest rates and any decrease in property prices will trigger a massive sell off in this sector of the market as worried ‘amateur’ investors try to move to safer havens for their pensions and savings.

Any triggering in a downward direction could possibly create a ‘domino effect’ as the market starts to fall and then collapses. It will be a test of the ‘real’ value of the housing market over the next six months as the market determines whether this ‘decrease’ is a temporary blip, or the beginning of a steady decline.

In previous articles we’ve discussed how ‘headlines’ can have an effect on market sentiment – below we’ve listed the headlines for the day with links – as anyone can see, they’ve very much shifted to a quite negative stance.

Headlines