Lecturer in Economics, Alan Shipman, offers his view on what the next year has in store for the UK housing market...
Judged by what they announced, UK policymakers moved decisively in 2017 to arrest the long rise in house prices , as part of a broader strategy to cut living costs and assist first-time buyers. But forecasters, looking through the words to the political intentions, still expect a gentle rise in the next two years. While stock markets and crypto-currency exchanges may now be on a rollercoaster, property seems set to stay on a more sedate racecourse, where the slopes are gentle and generally still up.
Government digs deeper to make first digs cheaper…
Theresa May’s government has clearer reasons than its immediate predecessors to want to rein-in house price growth, especially for first-time buyers (FTBs). While home owners (who usually gain from rising prices) are still a majority – 65% in 2016 - there is a growing, electorally significant minority that is desperate for more affordable homes to rent or buy. Extrapolation from 2001 and 2011 census data suggests that renters could outnumber home owners in over 100 parliamentary constituencies – some marginal - by 2021.
Younger voters, whose disillusionment with austerity and Brexit did much to squeeze the Conservative majority at the June 2017 election, would be more easily won over if the ‘housing ladder’ were lowered back within their reach. Their parents and guardians, who according to a 2016 survey are now contributing to over 60% of home purchases by under-35s at an annual cost of over £2bn, might be just as relieved.
Economic considerations reinforce the political pressure to contain house prices, at least so they don’t rise as fast as other prices or (more importantly) people’s pay. Prices have consistently outgrown average earnings during the recovery, lifting the ratio between them close to the peak it reached immediately before the 2008 financial crisis.
This may might mean we are nearing the point where prices cannot rise further until incomes recover, so that price-restraining efforts are pushing at an open door. Or it might mean that further rises in 2018-19 force another rise in risky household borrowing, potentially renewing the last decade’s crisis conditions.
A change in official inflation definitions has added pressure to contain housing costs. In March 2017 the headline measure changed from the consumer price index (CPI) to CPIH, which introduces owner-occupiers’ housing costs (OOH) alongside council tax and rent. CPIH reached 2.8% in October and November – well above the 2% target - with OOH the biggest contributor since 2015, a trend likely to continue as mortgage interest rates rise further in 2018-19.
… and raise more roofs while the sun shines…
November’s Budget appealed directly to ‘Generation Rent’, sharply raising stamp duty on purchases of second homes, while scrapping it for FTB of homes (up to £300,000) to live in. On top of earlier tightening of buy-to-let lending rules, this has greatly reduced the appetite for multiple home-ownership as an investment.
The government also made its first significant progress in 2017 towards the promised reduction in net immigration, which dropped to 230,000 in the year to June 2017 from 336,000 a year earlier. Post-Brexit uncertainties over expatriates’ status, and the pick-up in Eurozone growth, are expected to lower it further in 2018-19. While economists warn that consequent labour shortages may eventually hold back the construction of new homes, the immediate impact is likely to be a slackening of demand, especially for rented accommodation.
Alongside these efforts to keep ‘non-essential’ buyers out of the market, the government has amplified its already loud pledges to increase supply. The February 2017 Housing White Paper sets out plans to raise annual new house completions from the 140-150,000 achieved since 2015 to the 225-275,000 needed to tackle existing undersupply and population growth. Key initiatives pledged include issuing and implementing more planning permission, bringing new building firms into the market, training more builders and injecting £2.3bn through a Housing Infrastructure Fund.
… but still can’t promise a ceiling
Despite these efforts to stem the rise, most forecasts reflect estate agents’ expectations of another modest rise - around 1% in 2018. Few are predicting a decline except in areas where prices rose fastest in 2015-17. Charities working with the homelessness and marginally housed see no immediate end to the chronic shortage of affordable accommodation. So what’s going wrong?
Measures taken since 2008-9, the last period in which house prices fell in many areas, have been quite deliberately designed to push them up again, by expanding demand at a faster rate than supply. The market dynamics creates in the past two years, and set in train for 2018-19, are no different. Most of the 2017 Budget measures are set to increase overall demand for housing – continuing a succession of initiatives since 2010 (such as Help-to-Buy and Funding-for-Lending) that have stocked up FTB power, alongside that of professional property investors enriched by years of near-zero wholesale borrowing rates.
In contrast, there is unlikely to be any quick boost to the supply of housing - with a risk that housebuilding might even slow in 2018-19 as a result of rising interest rates, slower GDP growth and shortage of key building skills.
Interests stacked against sustained house-price drop
So the policy shift has not gone far enough to launch a new era of cheaper homes in the places people need them. But that’s unlikely to reflect any miscalculation. Despite their appeals to disenfranchised (and marginally housed) younger and lower-income households, those who shape housing policy are still confronted by powerful groups that don’t want any serious house-price falls.
The first counter-pressure comes, inevitably, from existing home-owners, for whom a drop in prices means a loss of wealth – and the nightmare of ‘negative equity’ if they fall below an outstanding mortgage. A major house-price crash leaving mortgages in arrears could even strain the solvency of some big banks, according to stress tests conducted at the end of 2016.
Then there is the UK’s ongoing need for inward investment, to finance a balance-of-payments deficit that would be hard to close without shrinking GDP. The current-account deficit widened to 4.6% of GDP (£23.2bn) in the 2nd quarter of 2017, defying hopes that the weaker pound since mid-2016 would narrow it by boosting net exports. The capital inflows that sustain this current deficit include foreign purchases of UK property which were estimated to account for 13% of new-build properties in London (and up to 85% in its prime locations) in 2014-16. Although the proportion is much smaller elsewhere, bidding-up of prime city property by foreign investors – which the government cannot afford to discourage - pushes other residents further out in search of affordable prices and rents.
These supply-side restrictions may be compounded by the financial interests of construction firms, on whom the government must rely for most of its targeted new builds and renovations. To maximise profit, private housebuilders control the release of new homes to make sure they don’t dent local sale prices, inevitably slowing the completion rate below what politicians are targeting. And they tend to build homes for those who can afford to pay most for them, often bargaining-down new estates’ ‘affordable’ component once construction is under way. The main solution to this – increased building of council homes, and constraints on tenants’ right-to-buy from councils and housing associations – is not one that recent governments have wanted to prioritise.
So while recent house price inflation is set to slow down, few areas can expect their housing to be significantly cheaper in a year’s time. There is, however, one caveat that that has risen in significance over the past year. Consensus forecasts assume there will be no sudden drop in the availability and affordability of mortgages for the majority of prospective buyers who still require one - and no loss of appetite for UK homes from those who can afford to buy without borrowing.
These conditions could be undermined if, internationally, there is a sharp drop in asset prices and financial market liquidity or a draining of confidence in UK economic recovery. Both events would force a sharp rise in interest rates (to stabilise the pound and curb inflation), and a slump in banks’ incentive and ability to lend.
While this remains unlikely, the risk has been heightened in the past year by clearer signs of an excess of credit in China, a loss of direction in the US and a bumpy road ahead for the Brexit process. If clouds over the UK economy trigger sales by the many property owners who don’t immediately need to buy again, there could be a much bigger ‘correction’ than present policy wants to pledge.