Wednesday 4th January, 2012
THE TROUBLE WITH HOUSING MARKET FORECASTS...

Housing Market forecasts are generally uninformed punts by people who should know better. A few weeks ago Grainne Gilmour @GG199 re-tweeted a Channel 4 list of 2012 predictions that ranged from flat to -12%, it included such respected sources as Knight Frank and Hamptons and self-styled sages such as Jonathan Davis. And these unqualified proclamations are then fed to copy hungry journalists anxious to offer their middle-class readers another reason to emigrate.

I accept that they may have been précised, but as far as I could see, only one of the pundits included in the Channel 4 piece explored the dramatic regional variations we will undoubtedly see and not one single one of them made it clear which particular market index they should be judged against. Now, when you consider we have a whole raft of indices published in the UK - everything from the Halifax and the Nationwide, through the Land Registry to the more spurious sources such as some of the property websites that ludicrously report movements in asking prices as authoritative data, it somewhat devalues any predictions made. I'm quite certain that if you searched long and hard enough you'd be able to find an index somewhere that proves everybody right!

To be fair, there are other problems too. The UK housing market is a complicated animal and it relies on a whole multitude of factors. Everything from interest rates, unemployment and credit availability right through to the performance of the national football teams if you believe some journalists. This means that when those respected estate agents with impressive national brands make a bold statement about how house prices might move in the next twelve months, it follows that they are also offering up their opinion on the international banking crisis, the Eurozone debt issue and the price of oil to mention just three out of hundreds of variables.

The fact of the matter is; it is only possible to predict the Housing Market over such a long period with any certainty when it described in relation to the general economy. But there are some key indicators out there that at least offer a reliable medium term barometer for the likely trends. My favourite of these is an EU survey with a large sample size that is unusually reliable, deliciously simple and particularly relevant. The three simple questions ask the respondent how they feel their personal finances will fare over the next 12 months, how UK plc. will perform and whether unemployment will get better or worse. Crucially, these key factors are the constituent parts of consumer sentiment and sentiment drives the market... along with the dynamics of supply versus demand of course.

In 2004 the respected Barker Review pointed out that house price inflation had averaged out at 2.4% per annum over the previous 30 years and to reduce that to be in line with general inflation of around 1.8% we needed to build around 70,000 more houses a year. To reduce it down to the EU average of 1.1% we should be building another 120,000 every year and that was when we were building around 200,000 anyway - rather than the 120,000 we built last year! This imbalance of supply and demand creates an underlying market strength that will see off all but the very worst of economic conditions. And prove the pundits wrong year after year.

Another mistake that many commentators on the market regularly make is to assert that builders like to see galloping house price inflation - nothing could be further from the truth. Trying to manage a multi billion pound business would be an awful lot easier if you knew that inflation would be around 2% a year rather than plus 15% this year and minus 5% next. I will resist commenting on the UK land market and the planning system (that puts me in mind of Dickens' infamous Circumlocution Office where maximum effort was applied to ensuring nothing ever got done), but it is this as much as anything that creates many of the issues behind the under-supply of new housing and land price inflation.

So, what's the Housing Market going to do in 2012? Well, first let's agree the metric. The Halifax Index is far from perfect but, its weighting formula is better than most and in the 29 years since its creation, it's been relatively consistent and gives us a benchmark against which we can measure.

I looked back at my tweet from December 2010 and it predicted a small fall in Q1, a rally in Q2 and flat in Q3 and Q4 meaning flat overall. Well, I got the first two quarters the wrong way round but other than that I wasn't too far out - lucky lad I hear you shout.

This year, in line with my rant in the early paragraphs, I'll qualify my forecast by pointing out that I make it on the proviso that there'll be no significant change in the macro-economy and Europe and the Euro will see the year out. RBS won't go bust and England won't win the European Championship. Crucially, I am assuming interest rates will stay at reasonable levels, meaning that the average buyer will be able to borrow money at around 5% or less.

There will be wild fluctuations across different regions in the UK and, after what will be an unremarkable first quarter, in a later piece I will offer my thoughts on how those regions will perform in Q2.

For our UK average Index value, in the first quarter I see little change from the current slight deterioration, perhaps minus 1 to 2%. Controversially, I see a firmer market in Q2 and I see the half year Halifax Index no more than a point or so lower than its December 2011 value. Q3 and Q4 is little more than the gut feeling style punt I was complaining about earlier, but I believe it is more likely to be minus than plus given the squeeze on incomes and the continuing dislocation in the mortgage market. My guess is we'll see the year ending at around minus 3 to 4%.

So, there you have it, another punt to go with those already out there - but I maintain the right to adjust my forecast in just the same way I amend my forecast for my own business as conditions change and external influences take effect.

Happy New Year!

Matt Fleming

Since 1985 Matt Fleming has been Chief Executive of Aylesworth Fleming Limited and since 2007 a founding director and shareholder of the £30m Emerge Group, one of the UK's foremost property marketing agencies.