UK Housing Market Overview

The UK housing market is posting a grim picture after rallying for five years straight on the back of eased monetary policies in the EU region.

House ownership survey 2017-18, by English Housing Survey, estimated that 14.8 million out of a total 27 million households ‘owned’ houses either directly or indirectly through mortgages. This leaves 12.2 million remaining households to the rented sector either private or social.

Surprisingly, private rented sector topped with highest prevalence of poor housing conditions at 25% followed by owner occupied and social rented sector at 19% and 13% respectively. This puts the aggregate ‘demand’ for better houses at 2.8 million with 1.7 million living in Category 1 hazardous homes.

‘Demand’ for accommodation has been high as the survey found 10% of the owners to have let out their house either partially or completely in the past one year. London and West-Midlands took the lead with one in 5 house owners agreeing to have done so.

While ‘Demand’ represents the minimum potential, actual demand remains subdued as noted by the Nationwide Building Society, the 7^th largest cooperative financial institution. Its Housing Price Index (Nationwide HPI), not adjusted for inflation, is flattening with year on year change approaching zero.

The index is based on estimated price of a typical UK house which uses hedonic regression based on factors like location, neighborhood, property design, number of bedrooms and whether the property as new or old. The data is based on Nationwide’s own approved mortgages and the regression technique instead of simple averages helps reduce the effect of outlier transactions. While the ‘typical’ house is a purely hypothetical house, it represents the market more effectively than actual transactions.

It is worth noting that even though bet markets have estimated hard Brexit possibility at around 40% the approved mortgages based housing price index is far from a crash as was seen in the great financial crisis in 2018. Even though BoE chairman seemed to compare hard Brexit as major catastrophe, the one of sending UK into recession taking out large businesses, Nationwide’s approved mortgages so far do not appear to agree.

The effect on house builders is nevertheless significant. Persimmon’s H1 2019 results disappointed investors as it declared a decline of 5.6% in revenues. With net profit’s down by 2%, it is worth noting that Persimmon is a large British house-building company with assets valued at ₤4.6b and market capitalization of ₤5.9b. Other smaller house builders not necessarily listed could be in deeper troubles creating stressed assets for the lending banks.

Pillar 3 Quarterly filings, with the UK Prudential Regulatory Authority(PRA), that helps in monitoring adequacy of provisions against bank’s risky assets is worth taking a look at.

RBS’s NatWest Holding Group, the holding entity of retail businesses in the UK has Tier1 capital at ₤25b of which ₤21b is through common equity. Tier 1 capital stands at 21% whereas the requirement set by PRA is at 11.6%of its total risk weighted assets (RWA). RWA for the group as of June 2019 was ₤140.5b with contribution of ₤120b from credit risk alone and around ₤20m from operational risk with significant scope of improvement in the later.

With ring-fencing of retail and investment banking businesses becoming a statutory requirement in 2019, the retail banks are expected to remain more stable. The housing segment though worrisome is perhaps not a reason to panic.