Readers of the PropRate analyst blog have noted that the prior blog posts have focused on the relationship of the user cost of capital and house prices. In preceding posts, the main emphasis was on various interest rates and the inflation rate. The ensuing posts are directed at the relationship between house prices and factors that influence the demand for property, primarily residential property.
Chart 1 Mortgage Demand and House Prices
Chart 1 above shows the ebbs and flows of mortgage approvals (level) and the ebbs and flows of the annual change in house prices (Lloyds-Halifax House Price Index). The mortgage approvals are an indicator of demand for property. It is clear from chart 1 that a lead-lag relationship exists between the 2 series.
Chart 2 Mortgage Approvals Lead House Prices
The peaks and troughs of the BOE mortgage approvals appear to lead those house prices by 4 to 6 months. The lead–lag relationship appears inconsistent over time. It would be interesting to research the causes for the variation in lead-lag periods in each cycle. However, as the history of the Bank of England (BOE) mortgage approval data begins in Q1 1993, this may be limiting factor.
More analysis can be done to examine the proportion of first time buyers (FTB) contribution to monthly mortgage approvals. FTBs allow the current home owners to move to a different house, thus they act as the main impetus for growth in the housing market. Therefore, if the proportion of mortgage approvals that are first buyers begins to decline, so does the housing market.