The Forecast Issue
House prices growth looks steady, but the market must try harder on supply..
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Like schoolchildren this time of year we go back to the books and assess where the housing market has been and where it is going to. Have things turned out as we expected, and if not what has changed? It seems the big thing we have learnt is that supply problems are more stubborn than we thought.
Looking back to our forecasts last winter, the outlook for house price growth is broadly unchanged. Overall the outlook for the housing market recovery is modest, with price growth across the country likely to be in single digits. Economic conditions are improving, but there are still constraints on affordability even though wages are beginning to rise. A lack of stock for sale will continue to support prices in the shorter term, but this should ease as we move into 2016. Price growth will slow in London, the South East and East, but will continue to catch up elsewhere as the economic recovery spreads out.
The things that we didn't expect is the strength of the performance of the London, South East and East markets – it seems the lack of availability of stock was the dominating force. New building has been disappointing, but it only makes a tiny difference to the overall stock, the short supply of existing homes is a bigger factor. Despite about 53,500 completions of private homes in England in the first half of 2015 (an increase of 16 per cent on the same period a year earlier), there were 15 per cent fewer homes for sale in 2015 than in the same period in 2014.
The regional pattern of stock shortages chimes with the expectation that price rises in London will now wane. In the North East the higher availability of stock is also consistent with relatively weak price growth. The North West stands out among all of the regions. The Northern Powerhouse is a factor here as confidence in the regional economy and its future prospects grow.
The elephant in the room is, of course, interest rates. While the Bank of England has said rates will rise ‘soon’ a rise clearly isn't imminent. Some mortgage rates are beginning to rise in anticipation of an increase, but it seems most likely that rates won’t actually move until Q2 2016. Furthermore, even when they do rise they won’t go far. The consensus seems to suggest rates will eventually settle at a new level of around two and half to three per cent, rather than the historical average of around five. And that’s good news for mortgage borrowers and a sustainable housing market.
There are, of course, up and downside risks to the housing market. Global uncertainties and the timing of interest rate rises and the future availability of both new and existing stock could all upset the path of the market. But the most likely outcome is that the economic recovery will be benign and rates will stay put until Q2 2016. That should help calm worries and allow the modest housing market recovery to continue to take hold.
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