GVA - UK housing market outlook
According to commercial property consultants GVA, the UK’s economic backdrop appears positive, regardless of another potential recession in the Eurozone. Consequently, the housing market has seen a resurgence in growth despite concerns in early 2014 that prices were rising too fast to be sustainable.
London recorded the strongest growth at 21%, though all regions documented growth during Q3 at an average increase in prices of 10.5% which followed a rise in Q2 of 11.5%. The average house price in London has risen by almost £100,000 since Q3 2007 and is now £401,000.
The buoyant London market has had a domino effect on regions near the capital such as the East Midlands, East of England and South West. This has elevated the average house price across the country to 2.5% above prior highs reported during Q3 2007.
Despite this growth, there has been evidence indicating the slowing of London’s housing market. For example, quarter on quarter growth was at 0.2% for London in comparison to 1.2% for the UK.
A decreasing number of new enquiries, a summer lull and fears of an imminent Mansion Tax are cited as a cause of this cooling. Sales in Q3 fell by 2% which followed the previous quarter’s drop of 4%.
Earlier claims of a price bubble, at least at national level, were baseless according to the report. This is shown by the comparison between the UK house prices of Q3 2014 and Q3 2007; 2.4% below and 36.7% over the trend rate, respectively.
Q2 2014’s quarterly mortgage approvals for house purchases were at the lowest number since June 2013, showing a 9.7% fall on a quarterly basis. However, this was an increase of 12% from Q2 2013 and twice as much as the number of approvals in Q4 2008.
Strong economic growth figures have prompted speculation as to when interest rates would increase in the future. According to Experian, the Bank of England base rate is forecast to rise from 0.5% at the end of 2015 to 1.0% in 2016 and 2.0% in 2017.
The general view is that, although there is no certainty in the pace, a rate rise is unavoidable. As a consequence, there have been concerns as to whether households will be able to manage the rise in borrowing costs.
One of the main inflationary pressures on the market is the increasing gap between completions and household growth. The shortage in the supply of housing is likely to be a key issue during the general election in 2015.
However, there is a sense of gaining momentum in housing supply due to figures showing increased private dwelling constructions (a result of significant rises in house prices in London and the South East).
There is significant inflationary pressure due to supply constraints on the housing market, which may be resolved through the private sector playing an increasing role in providing intermediate housing.
The short-term outlook is that although economic growth remains strong, wages are still constrained and the Eurozone (our main trading partner) is at risk of another recession – which may well lead to a slowing of the economy and a delayed base rate increase.
This will likely cool house price growth to a ‘more sustainable’ 5% (compared to 2014’s 9%) this year.
In the long-term, however, the ongoing gap between construction and demand will ensure upward pressure on house prices.