Demand for home in the UK is set to fall in 2017 but an ongoing shortage of supply will mean prices continue to rise, according to new research.
With not enough new homes being built and historic low interest rates the supply and demand gap will go on although slower economic growth and affordability constraints will still affect the market, says the report from the Halifax.
The lender is forecasting that prices will rise between 1% and 4% during 2017 but cannot be more precise due to the high level of uncertainty over how the economy will perform with the official process of leaving the European Union beginning by the end of March.
It says that reduced housing demand is likely to result in lower house sales as more people respond to weaker economic conditions and the deterioration in housing affordability by not buying or moving home.
The Halifax also predicts that the buy to let sector is expected to cool further in 2017 as a result of impending tax changes and stricter underwriting criteria. Landlords also face higher costs with a ban on letting fees expected to be passed on by agents.
Meanwhile, the relatively adverse housing affordability position in London suggests that price growth will slow more sharply in the capital than elsewhere in the UK during 2017.
‘The housing market is critically dependent on how the wider economy evolves. We consider it most likely that the UK economy will soften over the course of 2017. This is most likely to result from the weakening of sterling pushing up import costs and dragging on purchasing power, both for consumers and as a determinant of business investment spending,’ said the Halifax’s housing economist, Martin Ellis.
‘Slower economic growth in 2017 is likely to result in pressure on employment with a risk of a rise in unemployment. This deterioration in the labour market, together with an expected squeeze on households’ spending power, as inflation picks up and outpaces earnings growth later in the year, is likely to curb housing demand,’ he explained.
‘These factors, combined with increasing affordability constraints, particularly in London and the South East, are likely to result in a further easing in annual house price growth during the coming year, continuing the trend seen since the spring of 2016,’ he added.
He pointed out that the level of uncertainty around any economic forecast is higher than usual at present. ‘It’s very difficult to predict the likely path for both consumer and business confidence during 2017, due to a wide range of possible outcomes regarding the extent of the expected worsening in labour market conditions and the size of the squeeze on purchasing power,’ said Ellis.
However, he also pointed out that despite the high level of uncertainty, UK house prices should continue to be supported by the shortage of property for sale, low levels of housebuilding, and exceptionally low interest rates.
‘The expected slowdown in house price growth is likely to be accompanied by a decline in activity with reduced housing demand resulting in lower levels of house sales as more people respond to weaker economic conditions and the deterioration in housing affordability by not buying or moving home,’ he added.
Looking at what happened on a regional basis in 2017 the report explain that strong price momentum was seen across the South of England led by a 10.2% rise in the South East while in the North of England prices were u[ 5% or less and in Scotland they fell by 1.9%.
The market cooled in London with the annual rate of house price inflation halved from 14.5% in the final quarter of 2015 to 7.9% in the third quarter of 2016. However, annual house price growth has remained above the UK average which was 5.7% in the third quarter of 2016.
Ellis explained that house prices in relation to average earnings are at an historical high in London at nine times annual average earnings. Additionally, mortgage affordability in London is worse than its long run average; the only region in the UK where this is so.
‘This relatively adverse affordability position suggests that price growth will slow more sharply in London than elsewhere during 2017. Outside London, there are few signs of significant stresses and imbalances at present, limiting the risk of a sharp slowdown elsewhere,’ he said.
He also said that momentum has already flattened in the most expensive areas of London during 2016, even if double digit annual price growth has been maintained in most other boroughs.
‘There is a risk of some price falls in parts of London, particularly in the most expensive central locations, in 2017.The recent fall in the value of the pound could, however, provide a renewed boost to the top end of the central London market by making it cheaper for overseas buyers,’ he concluded.
