Economic uncertainty is set to trigger two years of very low house price growth in the UK but an extension of the low interest rate environment will prevent a price correction, says new research.
Mainstream house price growth is expected to remain flat over the next year to 18 months, growing just 2% by the end of 2018 and a total of 13% by 2021, with the East of England likely to be the top performer with prices rising by 19%, according to the report from real estate advisor Savills.
However in the prime property markets the effect of uncertainty due to Brexit on top of stamp duty change means there could be two years of stagnation before this sector returns to growth in 2019 but overall prime markets will outperform the mainstream by the end of 2021, it says.
When it comes to sales the Savills report is predicting that transaction volumes will fall 16% over the next two years, recovering by 2021, but different buyer groups will be impacted differently
It also expects that reduced buy to let lending could constrain investor activity as rental demand rises, meaning that rental growth will outpace house price growth
‘There is no precedent for the current market and the Brexit vote makes forecasting more challenging than perhaps ever before,’ said Lucian Cook, Savills UK head of residential research.
‘The effect of Brexit is complicating a natural shift towards the later stages of the housing market cycle, when the strongest growth is seen beyond London and the South East. What is clear is that the housing market does not like political and economic uncertainty and this points to a lower growth, lower transaction market across the board,’ he added.
The report explains that negotiations for the UK to leave the European Union are expected to take two years, during which time buyer sentiment will remain fragile. However, it says that interest rates are now forecast to stay low for longer, which will prevent a market correction. At the same time, buyers will be reluctant or unable to stretch their borrowing, leaving little or no capacity for house price growth depending on location.
But the outlook will improve. ‘Greater economic clarity will bring improved consumer confidence, creating greater capacity for house price growth from 2019, although this will be constrained by inevitable interest rate rises, particularly in the higher value markets,’ the report says.
After inflation busting house price rises of the post credit crunch years, London is left with less capacity for growth than its neighbours, though the affordability squeeze may feed into the South East, the report explains.
It adds that the more affordable markets of the Midlands, Wales and the North of England theoretically have more capacity for price growth as they are less impacted by interest rate rises, but many lack the economic catalyst needed to unlock this potential.
The weakest five year price growth of 9% is predicted for the North East and Scotland, where Aberdeen will continue to be a drag on the national average as long as oil prices remain low. The North of England will begin to outperform by the end of the five year period.
However, more discretionary prime housing markets are expected to be especially susceptible to shifts in sentiment, resulting in subdued growth over the next two years. Thereafter, with less reliance on mortgage debt than in the mainstream, trend growth should resume, the report suggests.
The value gap between London and the rest of the UK suggests the commuter belt with growth of 20% and the South of England with growth of 17% will outperform prime outer London. But prime central London will see a bounce in values from 2019 and 21% growth over the next five years, assuming London’s global city status remains relatively unchanged.
Sales are predicted to drop due to weaker sentiment, the effects of mortgage regulation and slower house price growth but different buyer groups will be affected differently, the report says.
For example, first time buyers are likely to face ongoing challenges in raising a deposit and numbers are expected to fall 15% from 325,000 this year to 275,000 in 2018. Schemes such as Help to Buy will remain important if volumes are to recover by 2021, it suggests, adding that tougher lending criteria will also constrain mortgaged home owners looking to trade up, while cash buyer numbers, currently 35% of the market, may be discouraged by increased stamp duty.
Buy to let investors with a mortgage, some 10% of the market and therefore an important source of housing, face tax disincentives and impending mortgage regulation and in this sector sales are expected to fall from 120,000 to 90,000 in 2021, and hit a low of 80,000 in 2018, suppressing levels of new private rented stock brought to the market. The additional stamp duty for investment and second home buyers will also continue to impact cash buyer sentiment.
The report also points out that as first time and second stepper buyers struggle to access or trade up the market, demand for rental properties will increase. ‘This means that rental growth will be stronger than house price growth both in the short term and over the five year forecast period,’ it says.
Savills forecasts that average rents are likely to rise by a total of 19% and 24.5% in London, where access to home ownership is most difficult.
