This blog updates Proprate’s charts titled Sales-to-Inventory and House Prices and extends the prior blog with the regional sales to inventory.
Chart.1 below illustrates the correlation of UK RICS sales-to-inventory ratio (SIR) with that of house price inflation. Since our initial blog post in December 2010, the SIR has deteriorated. In addition, house prices have continued to creep downwards as predicted by the SIR. “The slightly weaker activity climate was also reflected in the average number of completed sales per surveyor (by branch), which fell by 3.4% in May to 14.7. Alongside the increase in new vendor instructions, the average number of stocks per surveyor (by branch) increased by 8.1% over the month to 71.3. Given the rise in stocks levels and fall in sales levels during May, the sales to stock ratio – an indicator of market slack – fell to 20.6%, well below the long run average of 33.5%”, according to UK RICS Housing Survey for May 2011.
Chart.1 Sales-to-Inventory Leads House Price Growth
Chart.2 below depicts the UK RICS regional sales to inventory ratios. All regions have deteriorating sales-to-inventory ratio, with London and South East regions having the highest sales-to-inventory ratios. Unsurprisingly, these two regions are leaders in house price performance.
Chart.2 Regional Sales-to-Inventory all Declining
Table.1 below highlights the percentage deviation of the sales-to-inventory ratio at different turning points in the Halifax House price index from the long-term average (Apr-1994 to May-2011).
Table.1 Stock-to-Inventory Percentage Deviation from Trend (average:1994-2011)
The East, South East, London and Midlands regions have the highest sales to inventory ratio. All regions are trending downwards without any signs of stabilizing. Table.1 shows that London exhibits the smallest deviation in sales-to-inventory ratio from its long-term average. Currently London is the only region bucking the downward trend in house prices as highlighted by the latest Nationwide House Price Q2 2011 report and the UK RICS Housing Market Survey.
Chart.3 illustrates the relationship between regional house prices and sales-to-inventory. The percentage change in house prices is calculated using Nationwide’s regional house price indices (from Q3 2007 to Q2 2011).
Chart.3 Sales-to-Inventory and House Prices (2007 Peak to Current)
According to the May 2011 RICS reports, forward looking indicators (sales expectation) are weakening. Furthermore, new buyer instructions have been trending upwards. Thus, the outlook is that sales are likely to grow at a slower rate to new instructions resulting in an inventory build-up. The speed of inventory build-up will help determine the rate at which house prices decline. Low interest rate level have propped up affordability and lessened the amount of repossession. The current trend in house prices and house market activity is likely to persist if the economic recovery remains subdued.