UK housing market imbalances driving up prices

The August RICS survey shows that, despite the buoyant state of consumer confidence and the continuation of super-low financing costs, the supply of housing onto the market remains insufficient to meet the growth in demand. This is the result of a combination of factors. Vendors of existing houses seem reluctant to put their houses on the market and the supply of new houses is constrained by a lack of capacity in the building industry.

The reasons for the limited flow of existing houses onto the market are not clear. Amongst other things, that flow is a function of house price expectations and mortgage costs. As the RICS survey shows, house price expectations are firming steadily so that does not look like the cause. If we look at the pace of mortgage approvals, the usual focus is on approvals for house purchase but, in terms of transactions in the existing housing stock, it is approvals for remortgaging that are relevant. A possible explanation for this is that, despite the historical record low interest rate level, remortgaging rates might not be as attractive as some of the deals that households obtained in the boom conditions before the crisis. That would mean that mortgage costs would rise if they moved house.

The supply of new houses is rising but, according to the construction PMI, the pace of housing construction may have already passed its peak. The housing construction sub-index peaked at 68.0 in July 2014 and has since fallen to 59.0 and sub-contractor availability is still poor.

Demand for houses is rising and, although it is well below the peak of 2013, is still well in excess of supply, driving down stocks. We construct a measure of excess demand as the difference between RICS buyer enquiries and vendor instructions. As charts 3 and show, this is putting upward pressure on prices.

The August RICS survey shows that, despite the buoyant state of consumer confidence and the continuation of super-low financing costs, the supply of housing onto the market remains insufficient to meet the growth in demand. This is the result of a combination of factors. Vendors of existing houses seem reluctant to put their houses on the market and the supply of new houses is constrained by a lack of capacity in the building industry.

The reasons for the limited flow of existing houses onto the market are not clear. Amongst other things, that flow is a function of house price expectations and mortgage costs. As the RICS survey shows, house price expectations are firming steadily so that does not look like the cause. If we look at the pace of mortgage approvals, the usual focus is on approvals for house purchase but, in terms of transactions in the existing housing stock, it is approvals for remortgaging that are relevant. A possible explanation for this is that, despite the historical record low interest rate level, remortgaging rates might not be as attractive as some of the deals that households obtained in the boom conditions before the crisis. That would mean that mortgage costs would rise if they moved house.

The supply of new houses is rising but, according to the construction PMI, the pace of housing construction may have already passed its peak. The housing construction sub-index peaked at 68.0 in July 2014 and has since fallen to 59.0 and sub-contractor availability is still poor.

Demand for houses is rising and, although it is well below the peak of 2013, is still well in excess of supply, driving down stocks. We construct a measure of excess demand as the difference between RICS buyer enquiries and vendor instructions. As charts 3 and show, this is putting upward pressure on prices.

"Our expectation is that the upward pressure on house price inflation will continue in the short term. Housing investment last year grew by 13.1%. The full national accounts are not available for the second quarter of this year. However, from the data already published, we can deduce that there was a big fall of nearly 4% in housing investment in that quarter, possibly reflecting uncertainty ahead of the general election. Even assuming a strong bounce in the second half of the year, the weak second quarter will probably hold back investment growth for the full year to only 4.5%. For reference, the Bank of England predicts growth of 6.5%",says Societe Generale.