The UK housing market is the source of constant debate and fervent speculation. It is seen as the ultimate barometer of consumer confidence and financial security.
People’s reading of the statistics is all too often skewed by what they would like them to say. We frequently hear of ‘unsustainably high house prices’, the prospect of an ‘imminent correction’ that will miraculously make housing affordable to the masses.
Simultaneously, we hear of record high house prices supported by low interest rates, continued monthly house price growth recorded by the leading market indices and forecasts of more price growth to come.
What then is the current position and what can we expect to happen next?
In the 10 years since the credit crunch, house price growth has varied wildly across the country. In London, values have risen by an average of 68 per cent. At the other end of the scale, in the north east, they are still below their 2007 high. So house price affordability – and the ability to get on and trade up the housing ladder – varies significantly from region to region.
Different parts of the UK are reacting differently to current market forces. Some markets still have greater capacity for growth than others. This said, at a national level, and indeed across most of the country, house price growth has slowed over the past 12 months.
Sentiment is fragile. Buyer confidence has undoubtedly been affected by the uncertain economic outlook stemming from the Brexit vote. And though the cost of mortgage debt is at a record low, hints at a first interest rate rise have put existing homeowners and buyers on notice that mortgage costs are soon set to rise.
Key Points
In London values have risen by an average of 68 per cent since the credit crunch
The average deposit for a first time buyer in the capital stands at just over £99,000
People will continue to trade up the housing ladder less often
Buyers have become more price sensitive and slower to commit, particularly at the top end of the market, where exposure to higher rates of stamp duty acts as a brake on price growth. For every 100 sales of homes over £1m outside the capital, there were 76 price cuts in the first six months of this year, a figure that rose to 122 price cuts for every 100 sales in London.
There is also particular pressure on the buy-to-let market, which has to adjust to greater exposure to tax at the same time as coming under the scrutiny of greater mortgage regulation. The impact of these factors has been uneven both at a regional and a market segment level.
London may have been the strongest performer over the past 10 years, but the markets of the Midlands have more recently been the most robust. House prices have risen by an average of 5.5 per cent over the past year, although slightly slower than the previous year, according to our mainstream house price indices.
Unlike London, this part of middle England has seen relatively modest net house price growth over the past 10 years, retaining the capacity for further increases. Right now it also has economic impetus.
In the north east, by contrast, where the economic catalyst is much weaker, our same measure puts annual house price growth at just 1.6 per cent a year. A relatively weak housing market a year ago, has remained so 12 months on.
Contrast that with the UK capital. In London, the years of strong growth means house price to household income ratios are far higher than across the rest of the country. Buying a house is a far greater financial commitment, which means buyers are much more cautious in this period of uncertainty.
So the slowdown here has been much more dramatic, with current levels of house price growth across the market as a whole struggling around the 2 per cent mark, according to our repeat sales index, when not long ago they were in double-digit territory.
Mortgage regulation, introduced in 2014, is beginning to play its part. In a market that had, to a large extent, become accessible only to more affluent households, the mandatory stress testing of mortgage affordability is now beginning to put a ceiling on the mortgage that even those households can obtain.
The statistics speak for themselves: the average deposit for a first-time buyer in the capital stands at just over £99,000. The average income of a mortgaged home-mover, who already has a foot on the ladder, is over £90,000. Both groups are borrowing an average of four times their household income.
But we do not believe that means prices in the capital are set for a substantial correction. Here, as in other parts of the south east, more regulation is doing what it set out to do. By preventing borrowers taking on an unsustainable level of mortgage debt, regulation aims to prevent them falling into financial difficulty when interest rates rise.
Although we cannot rule out some modest house price falls as the heat comes out of London’s market, the overriding impact is likely to be a long-term drag on future house price growth, even once there is greater clarity over the outcome of Brexit negotiations.
Within London, the rarefied prime central London operates according to a different set of rules, with a different set of drivers to the rest of the capital. Although it has been most impacted by the higher rates of stamp duty, we expect stronger mid-term growth assuming London retains its leading global city status.
More widely across the country, we expect the slowing in rates of house prices to continue to be led more by sentiment than underlying economics. This should leave room for another burst of house price growth as the uncertainty clears, but before interest rate rises reach a point where they bite into affordability.
At this point, the impact of mortgage regulation is expected to be felt more widely across the country, acting as a bigger drag on what people can borrow and slowing house price growth again at the back end of the next five years.
The reality is that this will occur in a continuing lower transactions environment than we saw before the credit crunch. People will continue to trade up the housing ladder less often and first-time buyers will remain heavily reliant on the 'bank of mum and dad' or government initiatives such as Help-to-Buy.
Constrained house price growth may not be music to the ears of the established home-owning generation. Nor will news that getting on the housing ladder is not set to get any easier lift the spirits of a younger generation of aspiring home owners. But however much we want the housing market to do something, it does not mean it will happen.
Lucian Cook is director of Savills Residential Research
