Our Opinion: 2018

UK House prices to remain subdued in 2018

UK house prices are likely to have grown around 4% in 2017. London has been a different entity. Whilst outperforming the rest of the UK for several years after the 2007 financial crisis, it has since been lagging the wider UK market.

Factors driving demand include strong mortgage availability, low mortgage rates and government incentives. However, high price to income ratios and tax changes for the investor, against a backdrop of weakening consumer sentiment, have held back mortgage approvals in recent months.

According to the Royal Institute of Chartered Surveyors (RICS) price expectations survey, slightly more surveyors expect UK house prices to fall in the coming months than expect prices to rise. With house price growth slowing since 2014, and only running at 3-4% currently, it is clear things are becoming incrementally hard for house prices.

Average London prices have underperformed the UK only once in the last 10 years, but every month in 2017 where figures have been published yet, show growth in London to have been below the UK average. For 2017, average UK and London house price growth has been 4.6% and 3.0% respectively. London has likely underperformed due to higher prices in London and, thus, lower affordability; with less benefit from government incentives and greater impact from the tax changes in the past few years.

Prime Central London prices have fallen the most in recent years. Since the peak, Prime Central London prices (according to Knight Frank) have now fallen 7.4% on average – whilst certain boroughs have fallen significantly more than this. The increases in the top end stamp duty, along with higher starting prices, and a less favourable tax environment for international investors, has weighed on central London prices.

New-buyer inquiries in London and the South East have been dramatically lagging the UK whist, in the rest of the UK, the East Midlands has reported the highest growth at 7% in the year to October.

Demand for housing is supported by availability of credit and government incentives. Meanwhile, supply of new housing gradually continues to increase, but a significant supply boost or price impact from the new government house building targets is unlikely. Second-hand supply is weaker with stocks on estate-agents’ books falling.

The outlook from surveyors is for average growth in UK house prices of 2% in 2018. With London house price growth in 2017 on track for 2%, the outlook from surveyors is for an average fall of 0.5% in 2018.

The regional spread in house price performance across the UK since the 2007 crisis stands at an astonishing 69% difference between the best and worst-performing regions.

To assess the outlook for the housing market from here, it is important to look at the status of the demand drivers, as well as supply plans.

In October, the Bank of England raised base interest rates by 0.25% to 0.5%. This caused mortgage rates to increase, signalling the
trough in mortgage rates is behind us. But the subsequent increase
in mortgage rates, so far, appears to be less than 0.25%. This is
a sign of banks willingness to reduce their own margins as competition between banks remains fierce.

The Bank of England is likely to keep base rates unchanged for the near future. The market currently expects the next rate hike decision to be in August this year.

Monthly mortgage approvals have fallen from above 70,000 to below 65,000, reflecting affordability constraints due to the high price to income ratios, as well as weakening consumer sentiment. While fewer mortgage approvals could suggest less demand and less buoyant house prices, they have not yet fallen to a level that is historically associated with falling house prices.

Credit is cheap, but due to the high costs of housing versus average salaries, deposits for mortgages remain a problem.

Help to Buy, the government’s share equity scheme for new-build properties below a certain value, has been instrumental in supporting demand for new-build houses, particularly from first-time buyers. With the return to more controlled loan to values from the banks, and with house price to earnings ratios in the UK at an all-time high of nearly 8x according to the ONS, first-time buyers need large deposits to secure a mortgage on a house. This deposit trap has been excluding first-time buyers from the market.

The Help to Buy scheme has improved access to the housing market, and 40-50% of new-build properties are now purchased using the Help following the introduction in 2016 of the additional 3% stamp duty surcharge on second homes, and the staged removal of mortgage interest deductions from 2017 to 2020, the proportion of buy-to-let investors in the new-build market has fallen.

The buy-to-let investor has to an extent been replaced by the Help to Buy investor. The whole UK mortgage market has seen the buy-to- let investor account for 17% of mortgages in the year to October, down from 20% a year ago. In the new-build sector this is more apparent. With Help to Buy investors now accounting for 40-50% of new-build purchases of private completions, the Help to Buy scheme is underpinning the new-build market.

With approximately 80% of Help to Buy purchases being made by first-time buyers, it is clear that the first-time buyer is, to an extent, replacing the buy-to-let investor.

Housing transactions are up about 9% on last year. But transactions have been slightly more subdued since the tax change in April 2016

At the 2017 Autumn Budget, the government committed to building 300,000 new homes per annum by 2020. Currently 220,000 homes are made available each year, short of the current target of 250,000. Given the government’s long run history of target shortfalls, and the estimated household demand of at least 250,000 new homes, a reduction in existing house prices as a result of supply increases is unlikely.

The economic backdrop, particularly with regards to the unemployment rate and monetary policy outlook always have an important role to play for the housing market. Consumer sentiment and long-term house price appreciation expectations are also key. Credit conditions are important for the domestic buyer, while the currency remains important to the international investor. Tax changes can have distinctive impacts on the UK housing market.

All in all, UK house prices are on a road to nowhere in 2018.

4th January 2018