With wide swathes of the UK's housing market now returning to growth, average house prices rose 10.9% in the 
year to the end of April, according to the Nationwide.

The extent to which buyers have rushed back to the market is reflected in the fact that residential transactions in the three months to the end of March were up by 31% on the same period a year ago, while mortgage approvals were up 45%. Transactions averaged 890,000 a year from 2008 to 2012 and have now risen to 1.14 million, though this remains some way short of a normally functioning market.

This has immediately raised questions as to whether the pace of the housing market recovery means 
it is all going to end in tears.

Comparing cycles

If we overlay national growth figures against the equivalent period in the last housing cycle, then real house price growth appears to have returned a little earlier than it did in the 1990s. Given that the market saw an unsustained bounce in 2009, this means values are some way ahead of where they were in the last cycle.

Whereas house prices have now recovered to within 21% of their 
pre-crunch level in inflation adjusted terms, at the same point in the last recovery cycle they were still 37% below their peak by the same measure.

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Growth factors

The return of house price growth 
has been underpinned by a number of factors: significant pent up demand from an unprecedented period of low transaction volumes; a sustained improvement in the economy; and critically, low interest rates.

The outlook for the economy has improved. In February 2013 the average forecasts for GDP for this year and next were 1.7% and 2.1% respectively. A year later they stand at 2.6% and 2.4% respectively. The knock on impact has been an expectation of early interest rate rises. Whereas the average base rate forecast for 2015 was 1.19% last year, it now stands at 1.56%.Back to reality

Those interest rate rises mean there simply isn’t the capacity for current levels of house price growth to continue, or for a repeat of the real house price growth seen in the period of the mid to late 1990s. However, as the economy picks up, more areas should return to modest price growth.

Price falls are not expected, unless we see irrational exuberance among home buyers. We cannot rule this out, but the prospects of this are likely to be constrained by the Mortgage Market Review particularly as more mortgaged home movers return to the market.

On the flipside

Of course prices are only one side of the equation; housing transactions are the other. As we have previously stated, the shape of the housing market fundamentally changed in the period 2002-07 and again post credit crunch. The consequence has been a generational divide in the housing market that we have looked at later in this document.

The element of Help to Buy that is linked directly to house building and limited in scope in relation to the market as a whole, has been extended to 2020. The success of the mortgage guarantee element is unproven and it has not been extended. This means a sustained recovery in transactions still remains reliant on improvements in a more regulated mortgage market.

Taken from
Residential Property Focus Q2 2014