The UK housing market has presented a confusing picture over the past 2 years. Unlike Spain, Ireland, or the USA, the lax lending conditions of the Boom years did not seem to lead to major price falls. In fact, along with Australia (benefiting from China's commodity boom), UK prices even appeared to recover.
This was due to a mix of exceptional circumstances:
• Most UK mortgages are on variable interest rates, so the drop in official rates meant many homeowners saw their monthly payments fall to near zero
• The continuation of bankers' bonuses, plus the arrival of wealthy foreign buyers, meant London houses in the GBP1m+ bracket were in great demand
• Outside London, stricter lending conditions meant total sales were down by 50% versus the 2003-7 period, causing average UK prices to be over-influenced by higher London levels
Now, however, there are signs that confidence is leaving the broader market. The chart above shows a correlation first developed by the Bank of England, to forecast likely prices. It shows the Nationwide's historical house price series adjusted for inflation (green line), versus the monthly sales to stock ratio produced by the Royal Institute of Chartered Surveyors (blue).
This shows an extremely good correlation since records began in 1978, confirming the Bank's rationale for its use as a forecasting tool. And now, the indicator is beginning to slip. This week's RICS report pegs it at 0.23, equal to annual price falls of 5%.
Underlying fundamentals for the market also seem to be weakening, with the coalition government proposing over 0.5 million job losses, in its efforts to reduce the deficit. Given the importance of housing to the UK economy, any major fall in prices could also have a major impact on chemical demand.
It would also impact overall EU demand, as the UK's $2.2trn economy is the 6th largest in the world. This therefore adds another element of uncertainty for companies as they complete their Budget process.