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18th Jul 2017 RICS UK Residential Market Survey: June 2017 – Uncertainty stifles market sentiment

• Price growth loses momentum most notably in the south of the country
• Activity indicators point to flat sales trend continuing over the coming months
• Average inventory levels hit a new low highlighting ongoing supply shortage

The June 2017 Royal Insitution of Chartered Surveyors’ (RICS) UK Residential Market Survey points to a further deceleration in house price inflation at a headline level although this masks significant regional variations. At the same time, the more cautious tone of respondents regarding sales activity shows little signs of turning with the net balances for new buyer enquiries, new instructions and agreed sales still stuck in negative territory. Significantly this is now also being reflected in the twelve month sales expectations indicator where the net balance reading has slipped to its lowest level since the immediate aftermath of the referendum.

The headline price balance eased from +17% to +7% in June, the softest reading since last July, however, this loss of momentum is not reflective of the underlying trend in all parts of the country. London data (largely picking-up the prime market and which tends to better reflect developments in the inner boroughs rather than the outer zones) continues to return the most negative net balance with no real easing observable in the pace of decline (of prices). Alongside this, the price balance is now more subdued in both the South East (which also better captures the mainstream market within the capital as well as the wider region) and East Anglia whilst the North continues to show little change from recent readings. There are, however, some notable exceptions with Northern Ireland posting a net balance of +41%, Wales a reading of +38% and the West Midlands and the North West at +33% and +28% respectively.

Turning to the activity indicators, respondents once again recorded a decline in newly agreed sales with a net balance of -5% consistent with a fall in transactions in the latest results. This is the fourth consecutive negative reading and reflects both a lack of stock coming on to the market and a more cautious stance from buyers over recent months.

Significantly the new instructions net balance fell again (-19%); this is the sixteenth month in a row that more contributors have indicated property coming into the market has dropped (rather than risen). Against this backdrop, average stock levels have slipped (albeit only very marginally) to a new low.

The June survey included additional questions in an attempt to gather further insight regarding the generally flat trend in activity. At a national level, 44% of contributors identified domestic political uncertainty as the biggest factor explaining the current state of the market. This compares to 27% who highlighted Brexit as the most important factor influencing the picture. Significantly, most parts of the UK apart from the capital showed a fairly similar pattern to the headline numbers. Interestingly in London, the political climate, Brexit and the changes in Stamp Duty were all equally citied as contributing to the lethargy.

Looking forward, transactions in the near term (next three months) are expected to remain broadly stable with a net balance +8% expecting an increase in sales nationally (rather than a fall); this is little changed from the +6% reading recorded in May. Meanwhile, there is now also a little more caution in terms of the outlook for sales growth over the next twelve months with the heading net balance dropping from +26% to just 12%, which is the lowest result since June last year.

In the (monthly) lettings market results (which are compiled on a non-seasonally adjusted basis), tenant demand edged up slightly over the month but new landlord instructions continue to decline. The rental expectations series rose in June but the underlying picture appears consistent with rents at a headline level continuing to increase at roughly the same pace as in recent quarters.

The five year expectation series’, meanwhile, show some moderation in perceptions as to where prices and rents are likely to go over the medium term. For prices, the latest reading (using a three month moving average) points to an average annual increase of 3.2% in each of the next five years while for rents the comparative figure is 3.6%. Although these projections remain above the likely increase in average earnings over the period, they are lower than recent readings suggesting that affordability issues may be impacting on expectations.

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