Whither UK Housing?

Synopsis

An increasing number of commentators have latterly been suggesting that the worst of the economic downturn may be behind us and that signs of the green shoots of recovery are starting to appear in both the UK economy and housing markets. Analysis by SAMI fellows, however, suggests that we may be seeing little more than a normal seasonal improvement in the housing market and that while the level of activity may be bottoming out, the shape and speed of any housing market recovery still remains highly uncertain. Those organisations that achieve a proper understanding of the uncertainties and forces at work, and the possible alternative outturns, are likely to be best placed to minimise further risk and seize new opportunities as they arise.

Detail

Over the past two to three weeks, there has been a noticeable increase in the number of commentators suggesting that the global economy and the UK housing market in particular may be through the worst of the downturn and that even if the green shoots of recovery are not yet evident, the UK housing market may be starting to stabilise.

However, a number of factors need to be borne in mind before we can be sure of calling an early recovery. Historic industry data clearly show that this is the time of year when any upturn in housing sales and prices is normally seasonally strongest. Thus, while some upturn in buyer interest and activity does now appear evident, this is from an extremely low base. The use of historic seasonal adjustment factors to suggest more than a seasonal bounce ought to be treated with caution until further positive evidence is available.

Research by SAMI members into previous housing market cycles in the UK and elsewhere indicates that there is a tendency for cycles to follow a number of distinct phases, even if the length and amplitude of activity of each cyclical phase varies between cycles. This research highlights the extent to which information flows, confidence and behavioural changes interact with other economic variables to drive cycles and the progression from one phase to the next. Not surprisingly, a key economic variable in this equation is the rate of job creation or destruction. In this context, it has to be noted that even if the rate of decline in GDP is slowing, and in the view of some analysts may bottom out this year, most expect a further sharp rise in UK unemployment in 2009 followed by a further significant increase in 2010. This in turn seems bound to take its toll on consumer confidence and demand for housing, and will result in further repossessions and, quite possibly, more downward pressure on ho use prices.

Even without further house price erosion, there is debate over whether housing developers have yet fully recognised in their accounts the potential diminution in value of land banks purchased at the peak of the cycle - much of which may not yet have entered the development pipeline. If so, there will be further consequences for their balance sheets, loan covenants and their ability to raise finance and fund future development and construction activity, once housing demand and sales do recover.

Combine this with de-leveraging in the finance sector, and there must be considerable scope for debate over the future shape and timing of any cyclical housing upturn, the future nature of UK housing provision and the identity of the key players. Consequently, those potential participants that thoroughly explore and understand the nature of the current economic and housing market uncertainties, the possible alternative future development paths, and then identify and monitor the key signposts of change, are likely to be much better placed to manage and mitigate potential risk and seize future opportunities as they arise.

Should you wish to discuss these issues further, please contact Colin Fletcher at colin.fletcher@samiconsulting.co.uk.