Residential Roundup - 20 October 2023
The consumer price index (CPI) rose 6.7% annually in September, marginally up on the 6.6% predicted. The September figure was unchanged on August, with the flatlining attributed to an increase in fuel costs last month.
On the face of it this is not great news for the government’s commitment to halving inflation by the year end. But economists are expecting more significant falls in October. Changes to the energy price cap, which came into force at the start of October, mean inflation rates are forecast to fall back to nearer 5% in October. With Capital Economics expecting the impact of the price cap alone will shave 1.3 percentage points from inflation this month.
A more significant fall in the inflation rate in October would also bring the UK closer to the rest of the G7. With UK CPI still more than three percentage points ahead of the US and Japan.
Wage growth easing affordability pressures?
Average wages rose at an annual rate of 7.8% in the three months to August. Higher than the inflation rate over the same three-month period. The first time for two years that wages rose more than inflation. Wage growth was highest in the private sector, up 8% versus 6.8% in the public sector.
But there are signs of some softening of the employment market. The number of job vacancies fell again between July and September, now under a million for the first time since July 2021. This reflects a 43,000 fall, but vacancies remain significantly higher than historic levels. Unemployment figures are due next week-expect a slight increase, albeit again from a low base.
The Halifax and Nationwide, usually more reactive to changes in the market, are showing annual falls of around -6% from the 2022 peak. A better reflection of the current state of the market than the latest government figures, which suggest values were broadly flat in the 12 months to August at +0.2%.
But the rate of price falls has been relatively modest compared with the global financial crisis. Nationwide data showing prices down -5.8% from their 2022 peak, whereas the 13-months on from the 2007 peak values had fallen by -14%.
One of the reasons why price falls have been more modest this time round (there are many) is inflation. With high inflation meaning even if house prices remained static in nominal (not adjusted for inflation) terms we are effectively seeing prices fall.
Of course, few think about the price of their house in real (inflation adjusted) terms, with homeowners who bought an averagely priced UK home a decade ago (paying £171,000) and selling in September 2023 (achieving £260,000) making a nominal £89,000, before costs. But stripping out inflation shows prices adjusted in line with RPI are at a similar level now to 2013.
With higher rates impacting buyers ability to purchase, the likelihood of house prices falling to align more closely with buyers purchasing power increases. But rather than seeing significant nominal falls it will be real house prices where we see a more substantial fall. Using the Nationwide Index shows annual falls in nominal terms of -5.3% but adjusted for inflation prices are down -12% in the last 12 months.
Delivering more homes
Labour appear to be positioning itself as the party of the YIMBY (YES in my back yard) as it announced ambitious plans to get Britain building. Sir Keir Starmer announcing the party plans to deliver 1.5 million new homes over the next five years, finally fulfilling the 300,000 home per annum target we have shot for (and consistently missed) in recent years.
But plans for a series of new towns and ambitious targets on affordable housing may prove harder to deliver in the current climate. The latest Q3 2023 figures from Molior London show new homes starts across the capital have fallen by a third this year, down 34% on the same period in 2022. With Q3 2023 starts at their lowest level since 2009.
Figures from Bellway Homes highlight the challenges ahead. Bellway expect to deliver 7,500 new homes in the year to July 2024, compared with 10,945 in the last 12 months. The housebuilder citing lower reservation rates as one of the reasons behind the reduction in planned activity. Bellway are not alone, with Barratt expecting to deliver 20% fewer homes in this fiscal year and Redrow forecasting a halving of their pre-tax profits this year.
Read more on our Head of Research & Strategy Adam Challis’ take on housing targets here.