Economic Uncertainty Undermines UK House Price Outlook as All Eyes Turn to Chancellor Sunak 

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Uncertainty about the length of the path back to the pre-coronavirus economy is tempering the outlook for the housing market, which suffered a fourth consecutive price decline last month even though values continued to rise over the year to June, according to the latest Halifax House Price Index.  

House prices fell -0.1% in June to an average of £237,616, a fourth consecutive decline according to Halifax - one of Britain's largest mortgage lenders. 

This was despite a sharp rebound in activity prompted by the easing of 'lockdown' restrictions that saw new mortgage enquiries rise by 100% and transaction volumes pick up "sharply" to 48,450. 

Declines are meaningful because prices hadn't fallen for four consecutive months since the aftermath of the financial crisis, although they still left the average price sitting at eight times the estimated average salary of £29.6k.

Prices rose in the year to June and by 2.5% too, which is more than three times the 0.7% rate of inflation in May, the latest for which data is available. It's also more than the UK economy's 1.5% rate of GDP growth for 2019 while in the financial world, prices were outperformed in the year to June only by traditionally safe-haven assets like gold and bonds. Riskier assets like stocks and commodities were mostly left nursing losses for the period.

"This is a much better indicator of market health and one that should reassure the nation’s home sellers, as well as bolstering the surge of buyer demand that has already flooded the market since lockdown restrictions were eased," says James Forrester, managing director of Barrows and Forrester, of annual prices.

Above: New buyer equiries to agents. Source: Halfiax House Price Index.

"We’re expecting to see a further boost in the form of a stamp duty holiday tomorrow, and while this has already drawn its critics, it will only act as a positive stimulus for the market in the long-term,” Forrester says.  

House price changes are watched closely because homes represent the primary source of wealth for many people, which can lead changes in prices to be reflected by changes in consumption and underlying activity within the economy.

The Halifax data comes after restaurants and pubs were allowed to open at the weekend for the first time since March, marking a further step toward reopening the economy, although gyms and leisure centres have had to remain closed. 

It also comes with all eyes turning to Chancellor Rishi Sunak's mini budget on Wednesday, where housing market participants are hoping to see a stamp duty tax holiday unveiled in order to boost demand. 

Above: House price changes at various intervals. Source: Halfiax House Price Index.

“The potential announcement of a stamp duty holiday by the chancellor tomorrow should help lift market sentiment, certainly where buyer demand is concerned. Of course, some are already forecasting that many buyers will hold off now to benefit later, causing a slump in the market as a result," says Marc von Grundherr, a director of Benham and Reeves. "While a valid point, it’s unlikely to send a market that is comfortably shifting through the gears into full reverse. The transaction process can be a long one, and it is doubtful that the average buyer will jeopardise their bricks and mortar aspirations, simply to save a few thousand pounds in stamp duty." 

Britain's economy contracted -20.4% in April after having fallen -5.8% in March, placing the country on course for an economic bruising unseen for nearly three hundred years while leaving many businesses dependent on government assistance or subsidy for survival. 

But the economy's plight hasn't ended with the national shutdown and could be slow to dissipate given the lingering presence of the coronavirus and the impact it could have on consumer confidence as well as business operating conditions. 

Footfall has been slow returning to a reopened high street while the businesses operating on them and elsewhere in the economy are being encumbered by social distancing rules that have radically reduced the space with which companies can accomodate and serve customers.  

"Latest media reports suggest a greater focus on preserving jobs than tax cuts, which chimes with our view of more limited and targeted measures next week, with further spending announcements, likely on the infrastructure front, to come in the autumn,and an across-the-board VAT cut only if retail data disappoints over the summer," says Bruna Skarica, a UK economist at Morgan Stanley. "We have an additional 3% of GDP of fiscal stimulus in our forecasts, which see a 15.6% of GDP deficit in FY2020/21,and 11.5% next. Elsewhere, the final round of Brexit talks continues in London next week. We still expect a constructive outcome, with a deal announced in the autumn."

Above: New coronavirus infections disclosed in the UK. Source: Worldometers.

"All eyes on Chancellor Rishi Sunak who looks likely to announce further measures this week to shore up the fragile UK economy, possibly including targeted support for vulnerable sectors, a temporary VAT cut and £500 vouchers for all UK adults," says Sebastien Burnside, chief economist at RBS. "On June 28th the volume of footfall on the high street was less than 40% of 2019 levels. Shopping centres returned to about half of the 2019 level."

The cost of government support for companies and households has imposed heavy demands on the public purse and financial markets, leading to coordinated action between HM Treasury and the Bank of England. 

That cost was still rising in early July and is expected to go on rising at least until October, which is the date at which the government furlough scheme is expected to be wound down.

Workers dependent on the scheme rose from 9.3 million to 9.4 mn in the week ending July 05, lifting the total cost from £25.5bn to £27.4 bn, which is equal to 1.25% of GDP. Support for the self-employed remained at £7.7bn, although the number of subsidised individuals rose from 2.6 million to 2.7 mn. 

"With help from the BoE, the decisive and broad actions taken by HM Treasury, such as the CJRS (Corona Virus Job Retention Scheme), have prevented an inevitable recession from developing into a financial crisis and depression," says Kallum Pickering, an economist at Berenberg. "But with the market panic over, the virus mostly under control and the economy recovering, the case for blunt force has lessened somewhat. Instead, expect Sunak to announce targeted measures to lift the flagging parts of the economy and those areas that may struggle under the continued social distancing measures."

Above: Government bounceback scheme statistics.

Growth of lending through the business interruption loan scheme slowed as the value of approved loans rose from £11.07bn to £11.49bn, when previously it's risen from £10.53 bn to £11.07bn. There were 53.536 approved facilities, up from 51,725, while the number of applicants rose from 104,569 to 107,309. 

Lending through the scheme for large businesses rose from £2.33bn to £2.58bn after a further 45 applicants were approved. There were a total of 394 approved facilities on July 05, up from 359, while applicants rose from 745 to 783.

The bounceback scheme that provides loans of up to £50,000 or 25% of turnover, whichever is smaller, was by far the most popular in the week to July 01 when the number of approved facilities crossed the 1 million mark. 

There were 1,013,410 approved facilities with a combined value of £30.93 bn on July 05, up from 967,229 and £29.51bn respectively the prior week, although this was after 1,240,701 applications for funding.