Confidence that falls in house prices are slowing down has increased dramatically in the past two weeks, according to investors on London’s financial markets. Residential property derivatives, which provide a forward view of house price expectations, are signalling that further price declines will be considerably lower than previously expected.
At the start of this year, the derivatives market was pricing in another 32 per cent fall in house prices between 2009 and 2011. But, in the last week, the market has shifted and is now suggesting further falls of just 12.5 per cent.
“There has been a dramatic and accelerating shift in expectations for the UK housing market, according to the property derivatives market,” said Richard White, head of derivatives at Rutley Corporate Finance, the finance arm of Knight Frank.
“While the market predicts further falls of 12.5 per cent, this is in stark contrast to the negative outlook at the beginning of the year,” he said.
White said the change in sentiment had been developing over the past two months, but that there had been a significant acceleration over the past week.
He believed the move has been driven by speculators buying property exposure at deeply discounted levels via derivatives.
However, on Friday, the Nationwide House Price Index for May, based on lending for actual property purchases, showed a 1.2 per cent monthly rise – although the building society said this did not mean prices had yet bottomed out.
Nevertheless, the improving outlook is in line with data showing an increase in activity in the housing market. In particular, estate agents and surveyors report a resurgence in the number of cash buyers.
E.surv, the chartered surveyors, said that one in three purchases this year had been in cash, compared with an average of 10-15 per cent in recent years.
Agents operating at the top end of the market have seen an even higher proportion of cash buyers in recent months. Savills, for example, estimated that 42 per cent of deals in March were cash, compared with around 24 per cent in 2006 and 2007.
Many of these buyers have been using cash from overseas to take advantage of the weak pound. Investors who have withdrawn money from the stock markets – or sold properties at the peak of the market – are also moving their cash into housing.
Agents at Savills said cash buyers were often able to negotiate better and faster deals than those needing mortgage finance. Some were even willing to pay over the odds as the supply of property on the market is so low.
The rise in activity has led some forecasters to temper their expectations of further falls.
Knight Frank, for example, said there was a consensus developing that property prices could fall a total of 30-35 per cent from their peak, rather than the 40-50 per cent total decline that forecast earlier this year.
However, there are fears that the disproportionate number of cash buyers could be giving the market a temporary boost, which might peter out later in the year.
“As the cash buyers use up their funds and drop out of the housing market, it could falter,” said Richard Sexton, director of business development at e.surv. His concern is that mortgage finance will remain tight, excluding first-time buyers and highly-geared buyers from the market.
Some mortgaged buyers are also being held back as lenders remain more conservative on valuations than estate agents or vendors. Buyers taking out a mortgage have to rely on the valuation by their bank meeting the price they are prepared to pay.
Mortgage brokers said some lenders were still downvaluing properties as they looked to protect themselves against further price falls.
Nici Audhlam-Gardiner, mortgage director at Abbey, said lenders were erring on the side of caution. “Lenders want to make sure they can get the value of the house back so they they tend to be more conservative than estate agents,” she explained.
