Market Insight - October 2017
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Calm seas, choppy waters, but risk of storms

There is no doubt that the UK will launch into uncharted waters as it leaves EU membership. As it begins to navigate the open seas, there will be choppy times ahead as consumers and businesses try to assess the implications. Confidence will rise and fall along the way, but assuming a relatively smooth transition, the prospects for the economy and its housing market are respectable.

The biggest issue for home buyers and renters is the effect of currency driven inflation on their household budgets. With prices rising faster than earnings, spending power is falling. Inflation has risen to 2.9% and with wages growing at only 2%, the squeeze on household budgets is clear. The latest economic growth data shows that consumer spending is falling and that’s important because consumer activity accounts for the biggest part of the economy.

In the short term this will dampen demand and with it, expectations of how quickly house prices will rise. Surveyors’ expectations have been weakening in London for some time, but the sentiment has now spread into other parts of the south. This is also evident from the ratio of achieved sale prices to the initial asking price. London has been particularly affected since the change in stamp duty in 2014 made it more expensive for those buying property around £1m or more. This isn’t a bad thing. Lower price growth is welcome as it makes home buying more affordable. Sellers also benefit from adjusting their expectations, achieving a realistic price more swiftly. And slower price growth is also welcome because it should lead to a more stable market. 

After a decade without a rise, sentiment is moving towards a hike in interest rates - but not just yet. We expect a 0.25% rise in rates from spring/ summer of 2018 followed by further hikes as economic growth starts to pick up, and wage growth accelerates, restoring households spending power and confidence.

As usual the headline figure disguises the regional picture. London’s market will slow the most, which entirely reflects the past levels of price growth and affordability. Expectations of future price growth potential are limited, which reduces some investor demand, especially from landlords . In addition, fewer landlord purchases, following the change in taxation. The end of year annual house price growth forecasts are positive throughout the forecast period, although there is likely to be some volatility, particularly in London.

In the prime areas of London, the outlook is a little more favourable. This sector of the market has already seen price falls and a revision of price growth expectations. We expect that to now adjust and for price growth to pick up. The rarefied nature of homes in this sector of the market mean that supply is always a significant issue. The smaller market size can also make the price data volatile. But London still retains its place as one of the top world cites, which means that it should also benefit from a stronger global economy.  

The long-standing issue with supply in the mainstream market will continue to be a support to house prices too. It is unlikely that there will be a significant boost from builders in a period where house price growth is low and input costs are rising. Even if the government meets its house building, it will do little to solve the previous undersupply. Leaving the EU single market will influence immigration and may help to reduce the rate of growth of households, but this is still some way off. In the rental market conditions are still favourable on the demand side. New taxation will bite harder over the next three years, eating into profit, which could increase sales by the most indebted landlords, reducing supply and boosting yields. However, tenants’ budgets are also being squeezed so rental growth is likely to grow slightly less than average earnings – at about 2% in 2018 rising to 3.5% by 2019.

 

 

 

 

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