House price expectations are not realistic

Nia Williams

June 17, 2010

Commenting, Paul Diggle, property economist at Capital Economist, said: “Surveys of house price expectations, although weakening, are yet to signal the renewed falls that we are forecasting for the second half of this year. However, their record in anticipating price movements is mixed, with consumers’ expectations in particular seeming to lag the market. Thus with some indices already reporting renewed house price falls and a recovery in the labour market unlikely, expectations data may yet prove too optimistic.

“Recent house price expectations surveys from RICS and Nationwide have weakened, although for now they still suggest positive growth over the coming months. The RICS balance of surveyors expecting a rise in prices over the next 3 months has dropped to just 5% from 21% in January. May’s Nationwide survey of expected house price movements over the next 6 months is for a 1% increase. This was unchanged from April, but down from a recent high of 1.5% in February.

“The record of expectations in correctly forecasting the market is mixed. Going into the housing market correction, the RICS measure was a strong leading indicator. However, in 2003 and 2005 RICS surveyors anticipated falls that never materialised. Interestingly, this measure did not anticipate the size of the bounce-back we have seen since mid-2009, possibly adding to arguments that the recovery is without a solid foundation.

“Consumer house price expectations from Nationwide have historically been a poor guide to future prices. Over the course of this cycle they have lagged the market by around 6 months. This would indicate that consumers adjust their expectations of future growth in response to current developments. Thus the current resilience in consumers’ expectations may not be significant.

“Taken together, the expectations numbers are indicative of a housing market that is treading water. We are more bearish and expect prices to fall over the second half of the year. In the short-term we anticipate that the squeeze on households will intensify as a result of the emergency Budget on 22 June, further weakening the housing market and dampening expectations. Fresh signs of weakness in the labour market will add to the effect.

“Over the longer-term house prices have to return to fair value. The house price to earnings ratio is around 30% higher than the historic average. The recent recovery has been caused by the absence of forced selling, itself a result of mortgage affordability being a touch better than the historic average. If further limits on mortgage availability emerge, and household incomes are squeezed further, we believe that the valuation constraint will start to bite. Surveyors are already starting to see this, but consumers have a way to come yet.”

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