London houses

A closely watched index tracking the UK housing market rose nicely in October, implying wider economic strength too, but what about next year?

The monthly residential market survey from the Royal Institution of Chartered Surveyors or RICS, is a good one. Produced by asking surveyors a series of questions and taking the net percentage balance, its headline index has proven to be good guide to the underlying strength of the UK housing market, and is even a good forward indicator of the UK economy.

During the period leading up to the Brexit vote, the index plummeted, moving close to zero, but has since rebounded.

The headline index, which tracks house prices during the previous month, rose from plus 18 in September (from just six in July) to plus 23.

As the chart below shows, it has done better in the past, but it is moving in the right direction.rics1

A sub index tracking new buyer enquiries, and a good indicator of future demand, rose from plus eight last month, and indeed minus four the month before that, to plus ten, an eight-month high.

The index tracking new sales instructions, a good indicator of future supply, rose from minus ten to minus three.

It is clear that demand is growing faster than supply.

Looking at the indexes tracking different regions, all areas, with the exception of the north east and London, reported growth.

Hansen Lu, Property Economist at Capital Economics, said that “activity growth is being held back by a shortage of homes for sale,” adding that the “fall in the number of homes coming onto the market helps to explain why the stock of unsold homes per surveyor fell to a record low of 44.5. Consistent with the picture of already high prices and limited stock of homes for sale, tenant demand was reported to have risen again in October.”

But what about 2017? Hansen Lu said: “With buyer enquiries rising but new sales instructions falling, market conditions look set to remain tight in the coming months. But with house prices very high, real wage growth set to fall and confidence still a little off pre-referendum norms, we think house price growth will continue to decelerate into 2017.”

On a similar theme, Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics said: "The national recovery in demand . . . looks fragile; mortgage rates now have little scope to fall further and households will endure a renewed real income squeeze next year. As a result, we still expect house prices to rise by only around two per cent in 2017.”