RICS Housing Market Survey for May
The May housing market survey from the Royal Institute of Chartered Surveyors (out overnight Monday/Tuesday) will offer important evidence as to whether or not housing market activity is showing any signs of picking up significantly and on how many properties are coming on to the market.
The supply-demand metrics in the housing market will be a key determinant in how house prices move over the coming months. The April RICS survey indicated that buyer enquiries had stabilized after falling over the previous 10 months (the balance improved to 0% from -6% in March and a recent low of -18% in November 2010). Furthermore, the RICS revealed that the average number of sales per surveyor increased to 15.2 over the three months to April from 14.3 in the three months to March, which had been the lowest level since June 2009 (to put this in perspective the long-run average is 26.5). Meanwhile, the number of houses coming on to the market rose appreciably in April as the RICS balance measuring vendor instructions shot up to +18% from +4% in March. The RICS attributed this to much-improved weather.
Meanwhile, we expect the RICS survey to reveal that the balance of surveyors reporting that house prices rose over the previous three months edged up to a still historically weak -20% in May from -21% in April and -23% in March. This balance stood at -31% in January and an 18-month low of -49% in October 2010.
We suspect that modest falls in house prices are more probable than not over the coming months as tighter fiscal policy and the possibility of gradually rising interest rates before the end of 2011 maintain pressure on the housing market. On top of that, high unemployment, negative real income growth, elevated debt levels, and still-significant difficulties in getting a mortgage (particularly for first-time buyers) do not bode well for house prices. Furthermore, low consumer confidence will make many people reluctant to risk buying a house. Significantly, housing market activity remains at a very weak level that historically has been associated with falling house prices.
Some support to house prices could come if the number of properties coming on to the market is limited over the coming months. Meanwhile, affordability measures are mixed. On the favorable side, mortgage payments as a percentage of disposable income are currently very low compared with past norms. Nevertheless, the house price/earnings ratio is above its long-term average.
On balance, we believe that house prices are likely to end up declining some 10% overall by the early months of 2012 from their 2010 highs. This implies that they will fall around 5–8% from current levels depending on which house price measure you take.
Inflation in May
Data out Tuesday are expected to show annual consumer price inflation stabilized at 4.5% in May after spiking to this level in April from 4.0% in March. This would keep inflation at its highest level since October 2008 and more than double the Bank of England's target level. Nevertheless, core consumer price inflation is seen easing to 3.5% in May after spiking to 3.7% in April from 3.2% in March.
We suspect that higher food prices and rising utility bills exerted upward pressure on inflation in May. This may well have been offset by a retreat in oil prices from their early-April peak levels and also by some retailers engaging in increased discounting and promotions to try to get hard-pressed consumers to part with their cash. The British Retail Consortium (BRC) has reported that overall shop price inflation eased to 2.3% in May from 2.5% in April. Food price inflation rose to 4.9% in May from 4.7% in April, but this was outweighed by non-food inflation moderating to just 0.8% from 1.2%.
Although consumer price inflation may well have stabilized in May, there remains a very real risk that it will reach 5.0% later this year. This risk has been intensified by Scottish Power announcing that it will raise its gas and electricity bills by respective averages of 19% and 10% from August. Other utility providers seem certain to announce similar hefty increases.
Consumer price inflation will hopefully gradually start trending lower towards the end of 2011 as the upward impact from value-added tax (VAT) developments, high energy, commodity and food prices, and sterling's past sharp depreciation wanes. In addition, below-trend economic activity and ongoing muted wage growth are expected to limit underlying inflationary pressures. Inflation should dip markedly at the start of 2012 as the impact of the January 2011 VAT hike drops out. We believe there is still a realistic chance that consumer price inflation will get down to 2.0% by late 2012/early 2013. Much will obviously depend on oil price developments.
Unemployment in May
Data on Wednesday are forecast to show that claimant-count unemployment rose a further 8,000 in May after increases of 12,400 in April (which was the largest rise since January 2010) and 6,400 in March. Claimant-count unemployment was up to 1.4686 million in April from a 24-month low of 1.4498 million in February. Claimant-count unemployment is currently being pushed up by recent changes made to the benefits system. The claimant-count unemployment rate is expected to have remained at 4.6% in May, having risen to this level in April after standing at 4.5% for five months.
The number of jobless on the International Labour Organization (ILO) measure is seen falling by 58,000 in the three months to April to stand at 2.460 million, although this partly reflects the fact that unemployment on the ILO measure spiked in December 2010. The ILO unemployment rate is seen stable at 7.8%. ILO data are also likely to show that employment rose by some 90,000 in the three months to April to stand around 29.25 million. This is largely due to a spike in the number employed in February.
Despite the overall firmer tone of the recent labor market data, we retain the view that unemployment is headed up over the coming months. We suspect that likely extended below-trend growth will mean that the private sector will be unable to fully compensate for the increasing job losses in the public sector that will result from the fiscal squeeze that is now really kicking in. We believe that private-sector companies will become increasingly careful in their employment plans in the face of a struggling economy and elevated input costs.
Consistent with this view, survey evidence from the Recruitment and Employment Confederation (REC) and accounting firm KPMG indicated that private-sector job creation slowed markedly in May to be at a seven-month low. Specifically, we forecast unemployment on the ILO measure to rise to a peak around 2.75 million around mid-2012. This would see the unemployment rate rise to a peak around 8.5% by mid-2012.
Average Earnings in April
Underlying average earnings growth (Wednesday) is expected to have remained very low compared with past norms. This is the consequence of relatively high unemployment, workers' job insecurity, and the ongoing need for companies to limit their costs in a challenging environment. Specifically, underlying average weekly earnings growth (regular pay excluding bonus payments) is seen edging back to 2.0% in the three months to April from 2.1% in the three months to March. Annual average weekly earnings (total pay) growth is also expected to have been 2.0% in the three months to April. Nevertheless, it may have climbed in April itself from just 1.7% in March because there was a sharp fall in bonus payments in April 2010. All these rates are well below the 4.5% level that is generally considered consistent with the Bank of England's 2.0% consumer price inflation target. They are also well below current inflation levels.
Current elevated inflation and households' increased inflation expectations do not appear overall to be feeding through to markedly lift wage growth. While there are signs in some of the latest surveys that pay might be picking up modestly in the private sector, it remains very low compared to long-time norms and it is being countered by pay being frozen for many public-sector workers. In fact, the May survey from the Recruitment and Employment Confederation (REC) and accounting firm KPMG indicated that growth in permanent staff salaries slowed to a three-month low in May, while temporary staff pay growth moderated to a four-month low.
We expect wage growth to increase only modestly over the coming months and to remain limited compared with long-term norms because of workers' weak bargaining position, given high and likely-to-rise unemployment. So households' purchasing power will continue to be squeezed markedly.
Retail Sales in May
Retail sales volumes (Thursday) are expected to have retreated 0.6% month-on-month in May after spiking 1.1% in April. This would see year-on-year (y/y) growth in retail sales volumes retreat appreciably to 1.5% in May from 2.8% in April. Survey evidence from the British Retail Consortium (BRC) indicates that total sales suffered a marked relapse in May after being pushed up in April by a compelling set of temporary supportive factors—the later Easter this year, the royal wedding, and very good weather. Survey evidence from the Confederation of British Industry also pointed to softer retail sales in May, although it was not as weak as the BRC survey.
The indications are that pressurized consumers have quickly put their hands back in their pockets after being encouraged to temporarily loosen their purse strings in April by a particularly favorable combination of factors. This is particularly worrying, given that consumer spending accounts for 65% of GDP.
Consumer spending fell 0.6% quarter-on-quarter in real terms in the first quarter of 2011, and the worry is that it will stay weak for some time to come as household purchasing power remains under severe pressure from high inflation, low wage growth, and tighter fiscal policy. In addition, unemployment is still high and debt levels are elevated. Furthermore, many consumers are likely worried that the Bank of England could start to raise interest rates before long. Even if the Bank of England only edges interest rates up, it will affect consumer psychology as people are bound to see the move as the first in a series of hikes. Meanwhile, the weak housing market has adverse repercussions for consumer spending (a healthy housing market activity boosts demand for carpets, fittings, and furnishings as well as major household appliances while rising house prices can have a significant wealth effect).
By Howard Archer
14 Jun - RICS House Price Balance, May: -20
14 Jun - Consumer Price Inflation, May (Month-on-Month): +0.2%
14 Jun - Consumer Price Inflation, May (Year-on-Year): +4.5%
14 Jun - Core Consumer Price Inflation (ex Food, Drink, Tobacco), May (Year-on-Year): +3.5%
14 Jun - Retail Price Inflation, May (Month-on-Month): +0.3%
14 Jun - Retail Price Inflation, May (Year-on-Year): +5.2%
14 Jun - Underlying Retail Price Inflation, May (Month-on-Month): +0.3%
14 Jun - Underlying Retail Price Inflation, May (Year-on-Year): +5.2%
15 Jun - Claimant-Count Unemployment Rate, May (%): 4.6%
15 Jun - Claimant-Count Unemployment Change, May (000s): +5
15 Jun - International Labour Organization Unemployment Rate, April (%): 7.7%
15 Jun - Average Weekly Earnings—total pay, April (3-Month/Year): +2.0%
15 Jun - Average Weekly Earnings—regular pay excluding bonus, April (3-Month/Year): +2.0%
16 Jun - Retail Sales, May (Month-on-Month): -0.6%
16 Jun - Retail Sales, May (Year-on-Year): +1.5%