Market Insight February / March 2019
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The headline figures mask regional variations

Brexit, whatever form it takes, will impact the housing market through its effect on household income and sentiment. But cyclical and policy changes over the last few years are also at play. House prices over the last decade have risen faster than incomes, raising the affordability hurdle, not just for first-time buyers, but for movers too. This, combined with rising stamp duty costs and mortgage affordability restrictions, has been weighing on activity for some time - Brexit has just been the final straw. 

Forecasting is tricky in the current climate but we assume the UK will leave the EU on 29 March 2019, with a deal and a smooth transition up until late 2020. During that period the UK will remain part of the EU in all but name and voting rights. 

It’s useful to put the market in context before looking forward. Nationally, house price growth has been slowing since the 2016 referendum and activity levels are still on the floor compared with pre-crisis levels. But there is a very mixed set of regional markets. Average annual house price growth in the UK has slowed to 2.7%. In London, house prices have been falling since March and are now 1.7% lower than 12 months ago. Yet in the North West prices rose consistently over the same period and are 5% higher than last year. 


The Outlook and Forecasts

Looking ahead we expect a 0.5% fall in house prices in 2019, with a modest recovery thereafter. We expect prices to fall in most parts of the country in 2019, with conditions in London, the East and the South weaker in the short-term. Overall we do not expect any significant increase in transaction levels as caution, low liquidity and fewer landlord purchases bear down on the market.

London has been hardest hit by affordability and sentiment has been weakened too. International buyers are still attracted by the capital, but their decisions will be driven by movements in currency in the coming months. We expect house prices in London’s mainstream market to fall -2.0% in 2019, but for the prime market to revive, with price growth of 1.5%. The East of England has been remarkably buoyant for several years, partly due to spill-over from London. Less housing wealth leaving the capital will restrain demand in the prime commuter spots in the East. Combined with rapidly deteriorating affordability, we expect prices will fall by about -2.0% during 2019. 

Similarly, we expect prices in the South East to fall by 1% this year, before returning to growth in 2020. We expect a 0.5% fall in the South West, although it looks relatively good value compared to surrounding areas. A home here costs 47% less than a home in London, down from just a 28% gap in Q1 2004. 

Price growth was strongest in the Midlands in 2018. Affordability here is not as tight as in the South and it is less exposed to the London housing market, but it is not immune to changes in sentiment. The Midlands (East and West) is particularly exposed to manufacturing which could see job losses depending on the Brexit outcome. 

House prices in the North East have only recently returned to pre-financial crash highs and still have some catching up to do. We expect prices to increase by 1% despite hard local economic conditions. However, future price growth will be dependent on some areas unlocking their potential through regeneration or infrastructure developments.

Price growth in the North West and Yorkshire and Humberside has been slowing, but they are well placed for growth over the next few years. There is still capacity for household finances to stretch and higher demand from landlords seeking the best yields should support demand.


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