U.K. House Prices Survey Miss Is Bad News for the Pound

 | Aug 10, 2017 | 9:00 AM EDT
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It was expected to come in at 9% and instead it showed 0%. That would be a big miss for any indicator, but for the U.K.'s Royal Institute of Chartered Surveyors (RICS) index of house price growth, it is a sign of a housing market that could start to weigh heavily on the economy.

The RICS residential market survey for July, released on Thursday, Aug. 10, showed house price growth stalling at a national level, pulled down by declines in London and the south-east of England. The RICS indicator is calculated as the percentage of surveyors reporting house prices increases minus those reporting declines. It was expected to rise to 9% from 7.2% in June.

In London, the percentage of surveyors reporting house price declines was almost 50% higher than those reporting increases, about the same as in the June survey. In the south-east of England, where usually house prices follow London closely but with a slight delay, over 20% more surveyors reported house price decreases versus those reporting increases.

The rest of the U.K. follows London and the south-east with a lag, so prices were still rising there. Besides, in those regions house prices were still relatively low, so they still are catching up with the previous rapid increases in the south-east of England.

The surveyors also were asked to compare sales prices with asking prices over the past two months. For homes marketed at more than £1.0 million ($1.3 million), 68% of respondents reported sales prices below asking prices. Of these, 33% said the discounts were up to 5%, while 26% said discounts ranged from 5% to 10%.

This outcome partly can be blamed on higher stamp duty on more expensive properties and the introduction of an additional tax for those buying second properties.

New buyer inquiries data were not encouraging, either, coming down slightly compared with June -- a net balance of -4%. Since last November, buyer demand has "failed to see any meaningful growth," according to the report. Newly agreed sales fell marginally as well. This indicator has been negative for five months in a row.

Another potential piece of bad news for house prices is that the lettings market is not as strong as it used to be. Rents have been falling for a while in London, partly due to a cap on welfare benefits that came into force last November, which has forced some people to move out as they no longer could afford to rent in the capital.

The survey shows tenant demand continued to edge higher overall, but it did so at the slowest quarterly pace going back almost 20 years. Rent increase expectations are modest, forecast at a little below 2% nationally over the next 12 months and 3% per year on average over a five-year horizon.

Against the backdrop of some jobs moving out of the U.K. because of Brexit and European Union citizens no longer coming to the U.K. in the numbers they did before the Brexit vote, it looks like demand for rental places could stay weak for a while. This situation, together with the removal of some tax relief for landlords, could push down demand from buy-to-let property buyers, thus weighing on house prices.

All this is bad for the pound for two main reasons.

First, the Bank of England will not dare to raise interest rates when home prices are weakening because it would be accused of bursting the bubble and causing a recession. So, even if inflation does exceed its 2% target, the central bank will do nothing. The pound therefore likely will remain weak or depreciate more versus other currencies.

Second, the government is likely to step in with more subsidies to help prop up house prices. It already offers home equity loans valued at 40% of the price of a property in London and 20% outside the capital, which homebuilders have built into their business models. There are endless possibilities for how these subsidies can be increased, from raising the percentage covered by the loan to raising the interest-free period, currently five years.

More expenditure to prop up housing on top of the public money that will be needed to help other sectors of the economy deal with the shock of leaving the EU will widen the budget deficit. This will hurt foreign investors' confidence in the government's ability to keep public finances in check and could prompt them to sell the pound.

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