Housing market Forecasts - 2018 Summer
COUNTRYWIDE HOUSING MARKET FORECASTS 2018 COUNTRYWIDE HOUSING MARKET FORECASTS 2018 Forecasts Executive summary 2014 2015 2017 2018 It will be a bumpy time ahead, but not a hard landing United Kingdom 8.5% 6.5% 2.5% -1.0% 2.0% 1 2 North East 3.1% 3.4% 0.5% -0.25% 2.0% North West 5.2% 4.1% 1.5% -0.25% 3.0% The Brexit shock The vote to leave the European Union (EU) has unsettled the housing market, but the major driver of its performance will be the path of the economy. That is uncertain as the arrangements for decoupling from the EU and the effect this will have on trade have yet to be seen. 3 4 Yorkshire & Humber 5.1% 4.5% 1.0% -0.5% 2.0% East Midlands 6.5% 6.8% 2.5% -0.5% 2.0% 11 will weaken markets In our central scenario we expect the economy to weaken and for this to impact house price growth and transaction levels as consumer confidence, household incomes and the labour market are affected. We expect UK house price growth to fall to 2.5% in and to -1.0% in 2017, recovering to 2% in 2018. 5 6 7 West Midlands 5.6% 5.4% 2.5% -0.5% 2.0% East 11.0% 10.6% 4.0% -1.0% 2.0% South East 11.1% 9.6% 3.5% -1.0% 2.5% 2 1 London and the South will feel it most We expect the London markets to see the biggest falls in house price growth, particularly at the most expensive end of the scale. Some of that slowdown is entirely unrelated to Brexit. Higher stamp duty is taking its toll, but after several years of double digit price growth, expectations of future capital gain have also weakened, reducing demand. We expect to see some correction in these markets in and 2017 but a recovery in 2018. 8 9 South West 6.9% 6.8% 3.0% -0.5% 2.0% Wales 6.1% 3.2% 1.0% -0.25% 1.0% 3 but the North and Midlands don t escape While London and South Eastern markets are expected to see the largest slowdown in prices, the North and Midlands are also expected to slow. Weaker economic growth takes part of the responsibility, but so too will uncertainty about inward investment, despite the support of a weaker currency. 10 11 Greater London 16.4% 10.8% 3.5% -1.25% 2.0% Scotland 4.7% 2.9% 1.5% 0.0% 2.0% Prime Central London* 18.0% -5.0% -6.0% 0.0% 4.0% Central London** 21.0% 5.0% 2.0% -1.5% 1.0% 9 4 5 6 Supply shortages will support prices The continuing lack of supply of property will remain a supportive factor for house prices. which will support demand in the rental markets Demand for private rented accommodation is expected to remain strong. Uncertainty about the path of house prices and slower levels of activity are likely to increase the supply and demand for rented accommodation. Those unable to sell in a slower market may choose to rent their property to gain an income, while those moving may choose to rent for a while before purchasing, particularly if they expect a reduction in prices. * Defined as selected postcodes within Belgravia, Westminster, Kensington & Chelsea ** Defined as selected postcodes within Ealing, Greenwich, Hackney, Hammersmith & Fulham, Haringey, Islington, Lambeth, Lewisham, Newham, Southwark Tower Hamlets, Wandsworth 8 7 10 Uncharted territory brings big forecast uncertainties There are higher than usual risks to these forecasts given the extraordinary nature of the challenges ahead. Most risks are to the downside and will be dominated by the UK s ability to leave the EU in an orderly fashion and maintain its trade links. It isn t certain, but an orderly exit is in the interest of the EU and indeed global economies, given the size of the UK s economy. 2 3
COUNTRYWIDE HOUSING MARKET FORECASTS 2018 COUNTRYWIDE HOUSING MARKET FORECASTS 2018 Economic Outlook & Risks Housing Market Forecasts The economy will slow but it is hard to know by how much Economic uncertainty characterises the outlook for the housing market The vote to leave the EU took the markets by surprise and it s still too soon to know how the conscious uncoupling will affect the economy in the short term. When Article 50 is invoked there will be two years to negotiate an orderly exit. But up to that point, the UK remains a member of the EU, with all the rights and freedoms of trade. The political disruption of the referendum result has also added to uncertainty, but that is likely to be relatively short lived now the new Prime Minister and her Cabinet are in place. The new Government has signalled a more relaxed approach to austerity. The economic indicators with the biggest bearing on the housing market are GDP, inflation, interest rates and the labour market. Most economists agree that leaving the EU will have a negative effect on GDP and as a result on household income growth, which is crucial for housing. Uncertainty is the biggest problem and that will affect investment decisions and hence the pace of economic growth. Sterling v USD and Euro 1.5 1.45 1.4 1.35 The new Government has signalled a more relaxed approach to austerity. Estimates of effect on GDP by 2020-0.0-0.5-1.0-1.5-2.0-2.5 HMT OECD NIESR IFS Overall the outlook for both house price growth and transaction levels over the next two years is weaker than before the UK s vote to leave the EU. But there is significant uncertainty about how the negotiations will progress and thus on overall confidence in the economic performance of the UK and its housing markets. There will be some downward adjustment to prices as the UK faces such uncertain times and a weaker economic outlook. Not all of that is Brexit related, although this event is likely to be a catalyst as buyers and sellers factor weaker conditions into their price negotiations. But as affordability has deteriorated, fuelled by an insufficient growth in the supply of new homes, some form of adjustment was always a possibility. Data on the ratio of asking to achieved prices shows that there has already been some impact on prices since the referendum. The ratios of asking to achieved prices have softened in most parts of the UK reflecting price negotiation in the face of the uncertain times ahead. There are, of course, a significant range of outcomes which could emerge which means that forecasting at this time is an even more imprecise activity than usual. The downside risks are large and unknown. But if trade negotiations progress well, the economic slowdown may be very brief and housing markets will be less affected, although the likelihood of an increase in interest rates in such a scenario is heightened. We expect the economy to slow significantly in the last half of but to begin to recover by the Autumn of 2017. For first-time buyers the issue of being able to raise the necessary deposit is most severe in London. While mortgage finance has been falling in cost the size of the deposit is still significant, even at a loan to value ratio of 95%. The availability of higher loan to value finance will likely be the largest factor in first-time buyer activity. For landlords we expect that buy-to-let borrowing will be affected, but not dramatically. The 3% stamp duty surcharge introduced in April has already seen lower levels of landlord activity in recent months. But the prospect of tapering of tax relief on interest payments from 2017 for landlords will also be a drag on sentiment. However, the opportunity to restructure portfolios into limited companies and benefit from lower corporation tax should support the appetite to invest in the private rented sector. 1.3 1.25-3.0-3.5 Price Growth (YOY) Difference in asking to achieved pre and post referendum 1.2 1.15 05 Jan Euro into sterling 05 Feb 05 Mar US$ into sterling 05 Apr 05 May 05 June The UK is a big importer so the 10% fall in Sterling means we expect inflation to rise significantly. That will erode households real spending power which in turn will affect economic growth and demand for housing. The Bank of England is prepared to look through this to support the economy. It has already cut interest rates to 0.25% and introduced a package of quantitative easing measures to stimulate investment and demand. This supports credit which makes this a very different time to 2008. In 2008 the credit crunch was the major cause of the lasting recession we faced, but with banks now much stronger and more resilient, lending markets - and housing - will still be able to function and satisfy demand. Overall we do not expect the UK to go into a deep recession, but there are many risks on the horizon, particularly those around the UK s ability to negotiate favourable trade deals. 05 July Source: BoE -4.0 Source: Forecasters The introduction of counter cyclical banking policies should support the supply of finance, which makes this a very different time to 2008. 15% 10% 5% 0% -5% -10% -15% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 F 2017F 2018F 1.5% 1.0% 0.5% 0% -0.5% -1.0% -1.5% -2.0% -2.5% -3.0% London North East East Midlands Sout East South West North West Wales West Midlands Scotland Yorkshire & Humber East 4 5
COUNTRYWIDE HOUSING MARKET FORECASTS 2018 COUNTRYWIDE HOUSING MARKET FORECASTS 2018 Housing Markets Rental Market Forecast The southern housing markets are likely to feel the biggest impact, but those in the north will not escape Despite extra taxes and regulation renting seems set to continue growing The weaker economic background will affect all of the housing markets in the UK. The effect of the vote to leave the European Union is likely to have a larger impact on markets in London and the South initially, particularly if there is a significant effect on the City of London. But this is a catalyst to the normal market cycle. Even without the decision these markets have seen the largest increases in price and as a result there is a stronger brake on activity and prices as a result of weaker affordability. We expect the London markets to see the biggest falls in house price growth, particularly at the most expensive end of the scale. Some of that slowdown is entirely unrelated to Brexit. Higher stamp duty is taking its toll, but after several years of double digit price growth in Prime Central London markets, expectations of future capital gain have also weakened, reducing demand. We expect to see some further correction in these Prime markets in and the early part of 2017, but a recovery in 2018. International buyers may offer some relief particularly to the London market 1,400,000 as the fall in Sterling makes a significant difference to the cost of investing. For example the equivalent value of a 1million property in US dollars is 10% less than before 1,300,000 1,200,000 1,100,000 the fall. This offers a large discount as compensation for any perceived extra risk. London, after all, remains a desirable and wealthy global city. 1,000,000 900,000 800,000 The prime markets are only a small proportion of the overall London 700,000 market. In the rest of London and the South East, weaker economic 600,000 confidence will also affect demand, on top of higher stamp duty and deteriorating affordability. Expectations of future price growth have fallen significantly following the vote to leave the EU, and while Russian Ruble Chinese Yuan it is a reaction to the outcome some will be due to the more natural effect of affordability and a feeling that prices are too high. With economic uncertainty in the mix too we expect to see more price negotiation which will affect the recorded rates of price growth. While London and South Eastern markets are expected to see the largest slowdown in prices, the North and Midlands will not be unaffected. Affordability pressures are less severe in these markets, but economic conditions are weaker with lower pay and higher unemployment rates than the UK average. The concentration of manufacturing also leaves parts of the North and the Midlands in particular, exposed to uncertainty about export tariffs and inward investment, despite the support of a weaker currency. We expect the London markets to see the biggest falls in house price growth. Price of a Million home in local currency - June 2015 = 1,000,000 01/06/2015 01/07/2015 01/08/2015 01/09/2015 01/10/2015 01/11/2015 01/12/2015 01/01/ Euro 01/02/ 01/03/ 01/04/ 01/05/ Japanese Yen 01/06/ Some of that slowdown is entirely unrelated to Brexit. 01/07/ USD Source: BOE / Countrywide Research Regional Price Expectations - Next 3 months Price expectations Net Balance, %, SA 20.0 10.0 0.0 June 16 Wales -10.0 N. Ire S. West North -20.0 Y & H W.Mid Scot N. West -30.0 S.East E.Mid East -40.0 3m average -50.0 Lon -60.0 Source: RICS Many of the economic risks set to affect the housing market could support the growth of the private rented sector. Heightened uncertainty in the sales market will likely mean potential first-time buyers delay purchasing decisions and more new households start off renting. Rental prices are usually closely tied to wages and unemployment, but increased demand from tenants will provide some support for rental growth rates. The last recession saw the private rented sector grow by 50% in five years, fuelled by uncertainly, falling incomes and a lack of credit. While credit conditions are much less of a risk today, it is likely that irrespective of economic conditions over the next few years, the rental sector will be bigger in 2018 than it is today. While tenant demand is set to grow, quite how supply will respond is harder to predict. The introduction of higher stamp duty rates for landlords this year and the prospect of the tapering of income tax relief on mortgage interest will limit the appetite of many smaller landlords to invest to provide additional rented homes. After a spike in landlord purchases in February and March as investors brought forward purchases where they could, the higher rates have resulted in landlords buying fewer homes. While landlord purchases may well increase during the latter stages of, it seems likely that the current lower levels may well be somewhere close to a new normal. More experienced landlords though will likely see an opportunity to restructure their portfolios into limited companies and benefit from lower corporation tax and could contribute more to the supply of rented homes. Given the ability of larger, institutional investors to take a longer term view of market conditions, it may be that it is the build-to-rent sector which is best placed to ride out housing market uncertainty and build more homes for renters. The housing policy of the new government will be very influential in how much Build-to-rent can deliver. Overall it seems the demand for rental accommodation will continue to grow, which will underpin the case for investing in the private rental market. This is particularly the case as there is still insufficient supply of housing in the UK to buy, and the possibility that greater uncertainty about the sales market will lead to increased demand for rented property. Rental Market Forecasts GB Rental growth Proportion of households privately renting 3.5% 21% 2017 4.0% 24% 2018 4.0% 25% 6 7
Authors Johnny Morris Research Director johnny.morris@cwideonline.com Fionnuala Earley Chief Economist fionnuala.earley@cwideonline.com