Lull in once-rampant British housing market to persist for years: Survey

LONDON: The British housing market, on a tear for more than two decades with only a brief correction during the financial crisis, appears to be set for a long pause as the government negotiates its exit from the EU, a Reuters poll showed on Thursday.
With average prices now at many multiples of an average salary and prohibitively expensive in London for most people, UK house prices are set to at best keep pace with overall inflation in coming years or even fall behind.
That is all the more notable given that the Bank of England has cut interest rates to a record low of 0.25 percent and is not expected to move them for at least another two years while politicians navigate Britain’s uncertain path out of the EU.
The latest Reuters survey results come alongside a raft of recent data suggesting that consumer spending is slowing following an unexpected burst after the shock June 23 referendum vote to leave, as well as a slowdown in hiring and pay growth.
The Reuters poll of more than 30 property market economists and analysts forecast 2.5 percent growth this year, 2.3 percent next, followed by 3 percent in 2019.
By comparison, prices rose 7.2 percent last year, according to the Land Registry.
Meanwhile, a separate Reuters poll taken last week showed consumer price inflation is set to average 2.6 percent this year, in part because of the roughly 15 percent fall in sterling since the Brexit vote.
That means house prices won’t rise at all in real terms. Indeed, some respondents even saw falls in nominal prices.
For London, where the average price of a home is more than 10 times the average Londoner’s income, the poll forecast a negligible 0.3 percent rise this year, followed by 2 percent next year and 2.5 percent the year after that.
“Prices appear to have stalled over the past seven months, which raises a question of the extent to which the EU vote has had an impact on the market. It is not yet showing up in the annual growth rates but it is evident in the quarterly numbers,” noted Peter Dixon, UK economist at Commerzbank.
Recent survey data show London has taken the biggest hit, in part because of worries over what leaving the EU will mean for its many industries, particularly finance. There is also an oversupply of luxury flats in many parts of the capital.
However, an ongoing shortage of housing in Britain, particularly single-family homes, has not gone away.
And there is no real prospect of Britain aggressively closing its borders to immigration in the coming years while it remains in the EU.
“The lack of supply has been the biggest problem in the housing market for many years and I have no reason to suppose this will change in 2017. Brexit-related uncertainty will remain a problem but I do not expect this to do more than take the edge off the price inflation rate,” Dixon said.
Even given the high multiples of incomes that average prices currently are, there was a slight deterioration in how analysts rated affordability. On a scale of 1 to 10 where 10 is the most expensive, the UK was rated 6.5, up from 6 three months ago.
London was 8.5, also up from 8 in the previous poll, with five of 28 respondents saying 10.
Sinking pound
One ongoing concern is the fall in the pound. While on one hand it makes anything priced in sterling look relatively cheap for potential foreign investors, it also makes the housing that people already own worth less in a given foreign currency.
The biggest risk seen in the poll was Brexit negotiations turning fractious, also cited by economists as the biggest risk to the overall economy. Further falls in sterling are not expected to encourage more foreign investors to come into the market.
But not everyone agrees.
“In the medium-term, foreign investors looking for a rental yield are likely to face an attractive prospect. Weak real income growth and higher unemployment will reduce the ability to get mortgages, propping up rental demand,” said Oliver Jones, economist at Fathom Consulting.
“Despite small curbs to the buy-to-let industries, foreign cash-buyers of properties to let are likely to face reasonably strong demand combined with further falls in sterling.”
Other top risks to the UK housing market this year cited by analysts, in order of frequency of response, were: a correction in the London market; restrictions already placed on buy-to-let combined with increased property transaction tax rate; lack of construction of new homes; oversupply of luxury flats.