Market Analysis Winter 2010/11


Conclusions and Outlook


After a pre-election surge in the UK property market driven by buyer enthusiasm and an acute lack of supply in certain categories, the residential sales market has slowed more recently. The overriding trend in the market over the three months to November 2010 has been that of uncertainty over the future of the UK economy and a lack of confidence in the property market. This sentiment can be attributed in part to the fallout following the emergency budget in June and spending review in October, and mixed messages from the media and various house price indicators. These factors have conspired to create an atmosphere of confusion over how the property market will react in 2011. Over the second half of 2010 demand has waned and new vendors coming to the market have been more and more scarce as the reality of having to conservatively price a property hits home.


However, it is not simply the cuts, tax rises and conflicting indices that have contributed to this feeling of unease and lack of confidence. Lending conditions have also had a significant impact on the market. Lenders may be quick to blame general confidence in the housing market as the cause of the public’s low appetite for mortgages, but it is the level of lenders’ funding that has arguably had the biggest impact on the market in the second half of 2010.


From a lender perspective, long- term wholesale funding costs have risen and bond issuance conditions have become more difficult. These factors have dampened mortgage availability and constrained the market as a whole. While there was a slight pick up in the availability of attractive mortgages in October and November, this can be attributed to the fact that many lenders were using up the last of their limited funding for 2010 and is unlikely to constitute a longer term trend of easing mortgage availability.


While prime property continues to perform well and demand remains high, the market cannot rely on this particular segment to support it indefinitely. Property further down the chain fuels the market and drives long-term growth, in particular the first-time buyer market, and we will not see sustained and consistent growth in the sales market until lending conditions for these types of buyers can relax.


It is not just the sales market that is affected by overall lending conditions. As we saw for much of 2010, the private rental sector in the UK has continued to provide the safety net for those unable to obtain mortgages and this will be put under even more strain when the government cuts to social housing begin to take hold. Demand continues to outstrip supply in the rental sector and this has forced average monthly rents up consistently throughout 2010. With lending conditions unlikely to ease over the first half of 2011, we are likely to see further upward pressure on rents.


We anticipate another year of low sales volumes in 2011 with transactions remaining at a similar level to 2010. This has been verified by many lenders who have stated that expectations of further falls in house prices and tighter wholesale funding conditions would again act to limit funding availability in early 2011. The prime sales markets should remain resilient and we expect to see prices continuing to move upwards, perhaps by a further 5%, underpinned by low interest rates and a discounted currency. Less prime markets are expected to see a consolidation in pricing levels having retreated by as much as 5-10% in the second half of 2010.


The government’s austerity measures will have more of an impact outside of London and towns such as Oxford, which has a particularly high level of public sector employment, will be hit the hardest. It remains to be seen whether the private sector will have grown enough and be sufficiently resilient to pick up the slack.


As well as the availability of mortgage finance, economic factors will have a huge impact on how the UK property market fares in 2011 and key to this is what measures the Bank of England decides to take to control inflation. The most likely option is interest rate rises but it remains to be seen how quickly and how far the Bank decides to push rates. The economy could do without another spike in mortgage arrears and repossessions, so the Bank will have to be cautious with any move that it makes in 2011.


Market Analysis Winter 2010/11


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