Property numbers rise and prices slow as HIPs deadline looms

Average national asking prices showed their smallest gain of the year so far, rising 0.4% in May, according to Rightmove.co.uk.

This rise is smaller than one would traditionally expect in the peak of the spring marketing season, and it represents a major slowdown on the previous month. The result is a reduction of the annual rate of house price inflation from 15% to 13.1%.These are signs that the rising interest rate environment may finally be influencing sellers’ pricing decisions.

This coincides with evidence of some correction of the shortage of supply that has been instrumental in driving prices to record highs this year. The looming deadline to avoid HIP costs now appears to be motivating an increasing number of sellers to come to the market before June 1st. With less than a month to go, momentum seems to be building. Last month was the first time this year that average new listings per branch exceeded the number in 2006. This is continuing to nudge up average stocks per estate agency branch, with an increase from 59 to 61 this month.

It is further evidenced by the highest number of properties ever measured coming onto the market in Rightmove’s survey. Over the last month we saw over 200,000 properties newly advertised on rightmove.co.uk. The previous highest was June 2006 with 178,158 properties. This represents over 80% of properties coming onto the market, putting Rightmove in a unique position to measure the possible effects of the largest ever change to the home moving process in England and Wales.

Miles Shipside comments, “Whilst we would expect any rush to be in the next two weeks, new instructions per estate agent in the last two weeks are 4% up on last year, a substantial turnaround to this year’s average of 10% to 15% down. It is strange to see this in a rising interest rate environment, which would normally discourage more sellers. The added incentive for both them and their estate agents is to potentially save several hundred pounds by avoiding the cost of a HIP. This seems to be swelling the choice for buyers and shrinking the pace of price rises for sellers”.

Incentives to beat a deadline have a history of boosting activity in the housing market. There was similar behaviour in 1988 with the end of double mortgage interest relief at source (MIRAS) and again in 1991 when buyers rushed to beat the end of a stamp duty holiday. The difference this time is that it is sellers looking to make the saving, so dynamics are reversed. Thousands of sellers acting together means more properties come on the market. Ironically, this increased competition coupled with this months increase in interest rates means sellers might have to accept a price reduction of much more than the few hundred pounds they have saved by avoiding the price of a HIP. The extent of this market distortion could be exacerbated by a further rise in interest rates, deterring buyers further and leading to a stagnant period till the over-supply recedes. With the ongoing opposition to the introduction of HIPs, there is also the possibility that they will not be implemented on June 1st. This uncertainty is another factor for potential home movers to consider when they are also trying to juggle with the possibility of a further rise in interest rates.

Miles Shipside adds “It’s all rather confusing at the moment. The future direction of the market is very hard to read with two external influences likely to coincide at once. You have the potential of HIPs artificially increasing the supply of property and, within the same month, a 6 year high in interest rates potentially depressing the number of buyers. However, should HIPs go ahead, policymakers should be wary of the effect on the housing market of a further interest rate rise at this sensitive time”.

Nevertheless, significant falls in prices are highly unlikely without a substantial increase in forced sales, usually associated with serious growth in unemployment and an even higher growth than the recent hikes in interest rates. Indeed, prices could be underpinned by HIPs costs deterring some sellers from marketing after June. The market requires a sustained and well structured growth in supply of properties leading to a more sustainable and affordable property market to satisfy the needs of the growing numbers of households. Gordon Brown’s commitment to 1 million affordable and eco friendly new homes built by 2013 is a welcome announcement, though of little comfort to home buyers in the current uncertain market.