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Following the release of the States of Guernsey’s Q1 2024 residential property prices bulletin, Richard Hemans, IoD Guernsey’s lead on economics has commented.
"The latest property statistics show that the housing market is weaker than in recent times but only after a period of exceptional strength and is therefore transitioning to a more realistic state.
The market is not in distress as the key metrics around length of time to sell, final sales prices, debt levels and affordability illustrate. There will inevitably be some losers from the current state of the market and the record low number of transactions is stark, but the market is normalising and consolidating after an extraordinary period.
Local market house prices fell by 2.3% but are still significantly higher than before the pandemic, increasing by 45.1%. The fall in Q1 2024 was also not as steep as Q4 2023.
Q1 is always the quarter with the fewest transactions during the year, making it very hard to draw firm conclusions with such a small sample size, but the number of transactions recorded was only 93 in Q1 2024 - the lowest since records began in 1999. If the current trend continues, 2024 could see the lowest number of full-year transactions ever recorded, with the likely outcome fewer than 500 conveyances. This will have major implications for estate agents, who make their money predominantly on the volume of housing transactions, and public finances, which will have less support from document duty.
Local market house transactions fell by 18%, which suggests that the market is in stasis. It seems that people would rather not move than accept a significantly lower price for their home. Whether this will continue is unknown, but it suggests that people do not have an urgent need to move because they are not in financial distress, which is consistent with a strong economy where employment and wages are strong.
The length of time taken to sell a local market property was 181 days. Although it is taking slightly longer to sell a property, it is not high by historical standards or the experience of the last few years when the market was very active.
People are accepting lower prices than in previous years, but again it is not higher than historical standards, although it is higher than recent experience and underlines that demand is softer.
It seems that homebuyers are not taking on excessive debt to purchase their home, with the average loan to value at 78%, which is line with previous quarters. This offers a reasonable margin of safety should house prices fall further and offers some reassurance to both homeowners, lenders and the States.
Open market house prices declined by 7% based on the four-quarter average, but it is impossible to draw any meaningful conclusions from this when there were only 18 transactions.
Local market rental prices increased by 7.5% and are 43.9% higher than before the pandemic. The increases are tapering off, but prices are still very high.
The key affordability ratios show that house prices became more affordable in this quarter, with the price to earnings ratio falling from 16 to 14.8. Although this is still very elevated, it shows the impact of a period of stable or falling house prices and strong growth in earnings. A flat housing market for a couple of years combined with healthy increases in earnings will make the housing market more affordable. For example, if prices fall by 5% over the next two years and earnings increase by 4% per year, the price to earnings ratio will fall below 13 from 14.8 now.
House prices are falling but rental prices are increasing, which is making home ownership marginally more affordable compared to renting. It is still concerning, however, that rent consumes 55% of earnings. The less well-off will tend to rent a property rather than own one so the unaffordability of rent is a major social policy concern.
The average yield on properties is 3.7%, which is lower than inflation and long-term bonds so makes property as an investment less appealing.
Housing remains a major issue for the island with the lack of supply and affordability the main issues. The current state of the market does not suggest the economy is weak and indeed it could be interpreted as positive in some respects because house prices have not fallen significantly, the metrics are stable and there are not yet any signs of distress. Homeowners are waiting patiently as the market adjusts after a period of exceptional growth. The outlook should improve in the second half with several interest rate reductions likely, the market normalising and a relatively healthy economy, although it will not return to what we have seen in recent times. The States plan to intervene in the market to encourage supply and ensure social equity, but it is worth remembering that targeted, limited action is best and the market itself could also help naturally with the solution."
