Average house prices in the UK are set to rise 4.4% to £220,000 in 2017, but this is significantly below the rate of 7.4% seen in 2016, according to the latest forecast.
The 4.4% rise will be the slowest rate of annual growth since 2013 with the country likely to see year on year growth below 5% for the next two years after which the housing market is expected to pick up again.
The forecast from economics consultancy the Centre for Economics and Business Research (Cebr) points out that 2016 was a turbulent year for the property sector but the first data for the first quarter of 2017 suggests that the market is moving along at a steady if unspectacular pace.
It points out that mortgage approval numbers, a leading indicator for property transactions, have recovered from their low in the middle of 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 and 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 European Union referendum last summer.
Looking at the market fundamentals, the Cebr report says that the shortage of suitable housing continues to exert pressure on property prices and points out that 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 10 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, it adds.
‘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,’ the report says.
‘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 EU. 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,’ it explained.
It also points out that the Government’s changes to the buy to let sector mean that investors will no longer be able to fully deduct mortgage interest payments from their tax bill. Starting from now 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.
