Our forecasts for the housing market are shaped by forecasts from Oxford Economics for economic growth, household incomes, base rates and all the other variables that go into our model of housing affordability.

This host of variables is determined by their outlook for the global economy. This year, in common with virtually every other forecaster, they have been revising their outlook for growth consistently and constantly downwards. Expectations are now, at best, for continued lower growth rather than the gradual recovery predicted in 2010.

So we now find ourselves looking at a fundamentally altered national economic backdrop – and also a potentially confusing array of housing market indicators saying different things. Taken on an annual basis, house price movements in the 12 months to September varied according to which monitor you looked at.

Rightmove said, +1.5%, while, Land Registry and Hometrack said, -2.6% and -3.5% respectively. Our index for prime central London property was saying +13.6% while our index of prime regional property showed –2.8%. Clearly, market behaviour has been complex. There are three drivers at work in the market currently: 1. Overseas equity 2. Wealth created domestically and 3. Limited mortgage availability.

Prime Central London is acting as a safe haven for global wealth, so is growing. Prime South East markets and London-centric markets did benefit from city bonuses and financial sector recovery after March 2009 but are now waning. Elsewhere, there has been essentially no significant recovery since the markets fell in 2008 and transactions have been extremely low.

So the market has polarised in three directions: between the equity haves and have nots, between north and south and
between prime and mainstream. No wonder different indices are saying different things. Understanding these differences helps shed light on the market.

Asking price indicators reflect the optimism of vendors rather than
the price at which a property will actually transact. This is valuable in revealing the stickiness of supply that dogs the market. It shows
how turnover is often the first casualty of a falling market as sellers withdraw (or let) their property when they can’t achieve a desired price.

There is a difference between transactions involving a mortgage and those involving equity. Cash transactions are now a more significant proportion of the market than ever before. These transactions are not showing up in every index and are making the whole-market sample measured by Land Registry very different to what has gone before.

Valuation-based indices have a representative sample of all stock, not just the properties that are selling at any one time. They tend to pick up change earlier than others, which have to wait for vendor’s expectations to adjust and a transaction to take place. These indices outside London have picked up signs of further falls in property value and indicate vendors will have to adjust their expectations if they want to sell. This forecast issue suggests how much these expectations may need to adjust over the next five years in different markets.

Taken from
Residential Property Focus, Q4 2011