So far this year, the mainstream housing market has failed to gain any significant momentum. By the end of May, sale volumes were 3% below those for the same period of last year, and less than half of those recorded in 2007.

Research shows the cumulative shortfall in transaction numbers since the beginning of the credit crunch and the end of May 2011 is now more than 2.7 million across the UK.

Abnormal equilibrium

This implies we have an unevenly balanced market, with low interest rates set against severely constrained access to mortgage finance and weak economic growth.

This imbalance has resulted in a lacklustre spring market almost everywhere, except the prime markets of London.

According to the Nationwide, house prices across the country increased by 0.8% during the first six months of 2011, but it would be unrealistic to rule out price falls later this year.

The Royal Institution of Chartered Surveyors (RICS) reports an increase in unsold stock since the spring as the ratio between new stock marketed and buyer enquiries weakened.

Regional differences

There continue to be big differences in the UK housing market at regional and local levels. These differences reflect how dependent a market is upon mortgage finance to function.

It also reflects the extent of the wider economic pressures on it. The levels of equity held in a particular market, employment levels and household incomes also feed into the diverse geographical picture.

In a regional context, London is the most diverse market. Here, Land Registry figures suggest that prices in the Royal Borough of Kensington and Chelsea were 4.5% above their peak in the three months to the end of May, while they remained over 15% below their peak in Barking and Dagenham.

Similarly, transaction numbers in Islington in the 12 months to March 2011 were just 12% below their pre-crunch levels while those in the borough of Newham were down by 63%.

Views are split as to which way the scales will tip as the impact of interest rates, mortgage availability and economic recovery changes. Much depends on the extent to which interest rates rise and the capacity of the market to absorb them.

Interest rate rises

There is little prospect of a significant fall in house prices while the desire to protect a fragile economic recovery is pushing back the timings for interest rate rises.

Unfortunately, the certainty of future rate rises is enough to limit the prospects for price growth in the mortgage dependent markets.

Our UK mainstream house price forecasts for an inflation-adjusted price fall over the next five years remains essentially unchanged.

Prices will continue to be affected by the imbalanced market conditions, and the shortfall in the number of housing transactions will carry on rising as more households move into the private rented sector. We believe this will account for one in five UK households by the end of 2016.

Taken from:
Residential Property Focus, Q3 2011