Even before Theresa May called a snap election on 18 April, there were signs that the housing market was running out of steam. Figures from the Halifax in February showed the average UK house price fell by 0.9 per cent the previous month – the first drop in five months. And while that left prices 6 per cent higher than a year earlier, the rate of price increases had certainly cooled off.
It’s not hard to find a variety of reasons for the slowdown. First, a range of government policies introduced over the last two years have had a significant dampening effect on the formerly buoyant buy-to-let market.
These include the imposition of a 3 per cent additional stamp duty on purchases of second homes, and the forthcoming erosion of higher-rate income tax relief on buy-to-let mortgages. There’s also been a clampdown on the expenses landlords can claim, and an extension of capital gains tax to non-residents and companies selling property in the UK.
There have also been tougher rules on lending announced, particularly on buy-to-let and interest-only mortgages. And the re-emergence of inflation, since the Brexit referendum last June sent the pound lower, has created greater issues of affordability for many buyers. As Martin Ellis, the Halifax’s housing economist, put it in February: ‘Weaker economic growth and increasing pressure on spending power, along with affordability constraints, are expected to dampen housing demand, resulting in some downward pressure on annual house price growth during the year.’
Affordability still an issue
Some would certainly feel that a period of lower property inflation is overdue. In May 2016 the Halifax house price index was 9.2 per cent higher than 12 months previously. The continued strong growth in house prices since the financial crisis took place against a background of low general consumer price inflation and made affordability a growing political issue. By May 2017, Halifax’s index was up just 3.3 per cent over the previous May, after several months where the market was effectively flat.
Further evidence of this cooling off has come from other sources. The Royal Institution of Chartered Surveyors’ (RICS) residential market survey in May 2017 – in which RICS members around the country record their experiences and their expectations – showed ailing demand, with enquiries, instructions and sales all in decline, and little optimism of an improvement in the coming months.
Against this backdrop, a general election resulting in a hung parliament was the last thing many in the property industry wanted. So far, the dust has not settled and it is not possible to say what effect the election result will have on the property market, says Lucian Cook, director of Savills residential research. ‘We will have to wait and see if the market is going to take this in its stride, and in the meantime, we expected the result to mean continued subdued activity and lower transaction volumes,’ he comments.
At the beginning of the year, Savills forecast zero per cent growth in house prices in 2017 overall, with a 2 per cent rise in 2018, accelerating to 5.5 per cent in 2019, and Cook says it is not revising those figures for now.
Knight Frank’s latest estimate – published in May – is for 1 per cent price growth in 2017, followed by 2.5 per cent in 2018 and 3.0 per cent in 2019. However, research undertaken by the company in the immediate aftermath of the election shows a marked weakening of sentiment. The House Price Sentiment index, which Knight Frank says is a leading indicator of house price growth, fell to 53.3 – which means that just over 50 per cent of homeowners expect the value of their property to rise in the next 12 months.
Liam Bailey, head of research at Knight Frank, says: ‘It appears that the political uncertainty created by the election result has resulted in a fall in consumer sentiment regarding the outlook for house price rises – although there is a general belief that prices are likely to edge up further.’
Property consultant JLL believes the impact of the election result should not be overstated, since, as Nick Whitten, associate director of UK residential research, puts it: ‘The vast majority of buyers in the UK make long-term decisions based on their lifestyle and personal circumstances and these factors should not have changed materially as a result of the Conservatives failing to win a majority.’
Nevertheless, political risk will have a strong bearing on the market in the months ahead, says Cook, pointing out that the political backdrop has the potential to drive economic fundamentals. The two obvious risks are of Brexit negotiations failing, or producing a poor result for the UK; and of the government falling, leading to new elections.
This uncertainty is likely to deter some institutional investment in residential property, and may also lead some homeowners and buyers to keep their powder dry. ‘For now it will be much more of a needs-based market, with less activity from discretionary buyers,’ says Cook.
Nevertheless, favourable fundamentals remain strong and will underpin the current level of prices, in the absence of a more extreme economic shock. Interest rates remain low and, despite mixed messages from the Bank of England, they are unlikely to ramp up. Mortgage availability is better than it has been since the financial crisis and the low value of the pound will continue to encourage inward investment in UK property from overseas.
Perhaps most important, though, is the fact that demand outstrips supply as the population grows and the pipeline of new housing remains woefully inadequate. Theresa May’s pledge to allow up to three million EU citizens to stay in the UK after Brexit will bolster the demand side.
Whether her government can do anything to ease shortages in the short term is a moot point. Whitten argues: ‘The policy direction set out in the recent White Paper, of building more homes across the range of tenures, will be upheld by the new government. New methods of delivery to support this policy – such as Build to Rent and off-site construction – represent emerging and exciting sectors that will expand the pace of housing delivery.’
Sceptics think the election result may have kicked these initiatives into the long grass, however. Mark O’Byrne, a commentator at The Market Oracle website, takes a more pessimistic view: ‘Progress in any of these areas is unlikely to be evident for some time, especially prior to Brexit.’
Prospects for price crash
Nonetheless, any prospect of a crash seems remote right now, according to most commentators. As Liam Bailey puts it: ‘If we define a crash as a fall in prices of more than 10 per cent, the likely driver would be a sharp rise in mortgage rates, a sudden mortgage drought or a severe economic dislocation. The first two just don’t seem plausible in the near term, and the final one doesn’t seem a reasonable prospect when the global economy is in expansionary mode at the current time.’
That said, there is little agreement about how price rises will break down regionally. JLL’s most recent forecast of the UK residential market highlights the North West as the fastest-growing region in 2017, with 2 per cent price growth, while the North East and Wales are both in negative territory. Savills puts the East of England and the South East on top; while Knight Frank suggests the South West will lead the pack.
The next two years will be a nervous time for those investing in property; but in 2019 when a Brexit deal is finalised, most commentators are confident that normal service will be resumed.
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