- This is a sample of Cebr’s UK Housing Prospects analysis. To sign up for a 30 day free trial of Cebr’s forecasting and analysis service, please click here.
- Low transaction numbers over the coming years will hold price inflation down, with house price growth expected to remain subdued at 4.1% in 2018 before picking up again from 2019 onwards
- A mix of factors is currently at play in the UK housing market: government regulation including the rise in stamp duty on second homes and the changes in buy-to-let mortgage tax relief have taken steam out of the market.
- The effects of the vote to leave the European Union are starting to be felt by households as higher inflation erodes real income growth. A slowdown in consumer spending and a potential blow to consumer confidence present downside risks for the UK housing market.
- The accommodative policy stance of the Bank of England which lowered interest rates by 25 basis points in August last year has resulted in lower borrowing costs and helped to sustain activity in the mortgage market.
New forecasts by leading economics consultancy Cebr – the Centre for Economics and Business Research – show that UK house prices will grow by just 4.4% in 2017 – the slowest rate since 2013.This forecast, part of the consultancy’s Housing Prospects publication, sees growth at below 5% for the next two years until activity in the housing market is expected to pick up again.
After a turbulent 2016, first data for Q1 2017 suggest that the property market is moving along at a steady if unspectacular pace. Mortgage approval numbers, a leading indicator for property transactions, have recovered from their mid-2016 low and remain on a stable level of close to but just under 70,000 per month. While this is a low figure compared to the historical average, it is near the post-crisis high of 74,000 seen in early 2014. Though the number of mortgage approvals dipped slightly in February, secured borrowing continues to benefit from low mortgage costs after the Bank of England cut interest rates in response to the result of the EU referendum last summer.
Looking at the market fundamentals, the shortage of suitable housing continues to exert pressure on property prices – according to the government’s housing white paper, more than 40% of local planning authorities do not know how to meet local housing demand over the next ten years. Looking at the higher end of the market, those looking to sell can hope to benefit from a pick-up in foreign demand due to the low value of sterling.
While these factors will provide a bottom floor to price growth, substantial risks on the downside remain. Rising inflation in combination with stagnating wage growth has led to a halt in real income growth. This will hurt consumers’ disposable incomes and put a dampener on housing demand in 2017 and 2018. Furthermore, the property market is still reeling from additional taxes, which the previous government implemented not expecting that the UK would find itself preparing to leave the European Union. The increase in stamp duty on second homes, which was introduced in April last year, led to plummeting transaction numbers in the subsequent months which have still only partly recovered.
Additionally, the government’s changes to the buy-to-let sector are about to swing into high gear as private BTL investors will no longer be able to fully deduct mortgage interest payments from their tax bill. Starting next month, the government mandates that only 75% of taxes on mortgage interest payments can be deducted at the full rate of 40% while the remaining 25% will be deducted at a lower rate of 20%. Over the coming years, the tax system further reduces the share of pre-tax profits that can be deducted at the higher rate until in 2020 all pre-tax profits can only be deducted at a rate of 20%, essentially shifting the tax base from profits to rental income. This means that for the higher rate paying landlord the applicable tax deduction shrinks by 50% resulting in substantially lower net profits. Cebr expects this shift in the tax regime to significantly reduce the number of private buy-to-let landlords in the market.
Figure 1: Average UK house price – annual change
Table 1: Average UK house price – £ and annual % change
Figure 2 Average London house price – annual % change
Kay Daniel Neufeld