After five interest rate hikes since November the housing market is finally cooling and growth in consumer spending, including furniture purchases, is beginning to weaken.
Mortgage lending dropped significantly in August. According to the British Bankers’ Association the number of home loans approved was down 22% on August last year. And the number of house buyers in the market fell for the fourth month in a row, says the Royal Institution of Chartered Surveyors.
With the sharp weakening in the housing market, the Bank of England admits in the minutes of its September interest rate meeting that it may have underestimated the impact of falling house prices on consumer spending. Analysts estimate that if home prices fail to grow in the coming year or so, annual growth in consumer spending will drop from 3.2% last quarter to 2% by the end of 2005.
Nonetheless, August retail sales rose in total by 0.6%, following the largest drop in July since May 2003. But in the latest three months, sales volumes grew by only 1.4%, although they were 6.8% up on a year earlier. The value of sales by household goods stores rose 4.9% between the two latest three-month periods and by 5.6% compared with the same time last year. Furniture retailers and DIY stores performed particularly well.
The CBI‘s September survey of retailers shows that sales volumes improved for a net 32% of furniture stores. This follows year-on-year volume growth for an average of over 67% of outlets in the period June to August.
The British Retail Consortium, whose evidence from furniture retailers is often less upbeat than the CBI’s, says in its August report that furniture sales were “mixed” and that apart from good sales of beds, most areas suffered from weaker demand.
Government estimates suggest that the value of consumer spending on furniture and furnishings (excluding carpets) was 4.9% higher in the second quarter than at the same time in 2003. This followed a year-on-year rise of 6.2% in the year to the first quarter. The value of furniture sales in the whole of 2003 was down by 7.9% compared with the previous year.
Without the effect of retail price changes, and allowing for seasonal variations, the picture of spending on furniture is of an annual rise of 2.4% in the second quarter, following a rise of 6% in the first quarter. On this measure, sales in 2003 were down by 9.5%, compared with annual growth of 7.5% in 2002.
The outlook, according to economic forecaster OEF, is for the volume of spending on furniture to increase by around 1% next year and in 2006, and by some 3.25% in value.
There is scant evidence that demand for furniture will increase in the near future. Martin Hamblin GfK’s monthly poll of consumer attitudes to the purchase of big-ticket items dropped further in September to the lowest level since the end of 1999. Reports of falling house prices, the impact of higher borrowing costs and the fear of another increase before the year’s end are blamed.
Meanwhile, widely fluctuating furniture prices in the high street reflect the effect of discounting. An annual increase of 3.3% in June was followed by a fall of 0.1% in July and a rise of 0.9% in August.
Factory-gate prices for bedroom, dining and living room furniture eased by 1% in August, according to estimates by National Statistics. At the annual rate, prices fell by 0.2%, compared with a rise of 1.1% in the year to July. Manufacturers’ prices for kitchen furniture dropped by 2.6% in August, to a level 0.3% lower than a year earlier.
But lower prices on the domestic market will have to be matched by more competitive export prices if the growth in overseas shipments is to improve. In the first quarter the total value of wooden furniture exports was just 0.3% higher than a year before, while imports soared by over 23%. And in the first five months of 2004 a year-on-year fall of 7.7% in exports to non-EU customers was accompanied by a 17.2% increase in imports.
Hard-pressed furniture retailers may consider following the example of IKEA, and widen their appeal to include canine and feline consumers. However, IKEA’s current plans relate only to petcare accessories rather than to flatpack furnishings.
