MortgagesDec 8 2016

Prospects for 2017 house prices

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Prospects for 2017 house prices

House prices are expected to continue to rise across the UK (not including London) over the next 12 months, experts have claimed. 

A combination of house price rises regionally, together with slow or flat wage growth, is still hurting first-time buyers.

According to the Office for National Statistics, the average UK house price was £218,000 in September 2016. This is £16,000 more than in September 2015.

Some flattening in house price inflation since the Brexit vote may mean the rate of increase will reduce to a degree.David Hollingworth

Altogether, average house prices in the UK have increased by 7.7 per cent in the year to September 2016 (unchanged from 7.7 per cent in the year to August 2016), continuing the strong growth seen since the end of 2013.

Figure 1: ONS house price growth, percentage change

The latest Hometrack UK Cities House Price Index has revealed the significant disparity between wage growth in the UK, particularly in London and Greater London, and between rising house prices.

The index showed the average house price in the 20 largest UK cities is now at £241,200, up from £234,800 in May this year.

Jeremy Duncombe, director of Legal & General Mortgage Club, says while the market remains "as it was" in the lead-up to the vote to leave the European Union, "what hasn't changed is the fact house price inflation is continuing to rise well above wage inflation".

He says: "The expanding gap in supply and demand means that for many first-time buyers, homeownership is becoming an unattainable dream."

According to Hometrack's index, an 86 per cent uplift in house prices since 2009 has pushed the price to earnings ratio in London over 14 times, more than double the UK average of 6.5 times. Cambridge and Oxford are close behind.

Figure 2: House price to earnings ratio. Source: Hometrack

The report from Hometrack read: "In the short term we expect regional cities to continue to drive house price growth. Many of these cities have seen relatively limited house price growth in the past six years and have significant upside for house price inflation."

This forecast is subject to the outlook for the economy, borrowing costs and earnings growth over 2017 as the Brexit process is started.

According to Stephen Smith, director of Legal & General Housing Partnerships, the "ongoing rise in house prices is certainly not surprising".

He comments: "With the price of property increasing well above wage inflation, first-time buyers will continue to struggle to make their first step onto the housing ladder."

"High prices are clearly a key concern for first-time buyers", says David Hollingworth, associate director of communications for London and Country. "Saving for an adequate deposit when house prices continue to climb can only make the task harder.

"The rate of increases in price varies substantially depending on region, and the big rises in London and the south east have not been felt to the same degree elsewhere, however."

Price rises?

Some respondents believe prices may continue to rise. John Phillips, group operations director at Spicerhaart and Just Mortgages, predicts: "There will be modest increases in 2017, between 3 per cent and 5 per cent.

"Although this is lower than in previous years, it is important to remember the strong underlying market fundamentals of supply and demand are causing this rise."

Roland McCormack, mortgage distribution director for TSB, says: "We expect house prices to move in line with increases in average earnings, with continued regional variance."

"As for whether incomes will be able to keep up with house price rises", says Donna Hopton, founder of broker forum Cherry, "this is felt to depend on the levels that house prices rise to.

"Because over the past 10 years we have had easy-to-access mortgages, finance mortgage levels have been much higher than income multiples need to be in order to support them.

"Since the crash, this gap is starting to narrow and as long as it does, people should find it easier to get on the ladder."

Mr Phillips agrees. He says: "As for incomes, this has always been a concern but mortgage brokers and clients will continue to find a way."

Interest rate rises

At the moment rates have been promising, with the Bank of England base rate now at 0.25 per cent and predictions it could fall further to 0 per cent in the coming months.

As a result, the majority of new rate revisions from the major high-street lenders and building societies have been downward ones, although there is no certainty this will continue.

Should rates rise, the cost of servicing a mortgage for a first-time buyer will become much higher - added to the cost of the property itself, and the lack of wage inflation, this could be a potent debt cocktail for the average consumer.

"With higher costs, and higher interest rates and increasing inflation, we should see wages increasing, but the general sentiment may make this unlikely. This could dampen demand from first-time buyers", says Rob Sinclair, chief executive of the Association of Mortgage Intermediaries. 

Price falls?

There are suggestions house prices might come down in the light of Brexit.

Kate Faulkner, founder of Designs on Property, says: "With house prices in London having done well since 2009, there is a nervousness that with Brexit, house prices will come down.

"I say nervousness - some are excited and hopeful, but only if they are planning to buy in the future. Those in the middle of purchases or who have recently had an offer accepted understandably want to see where they stand in the wake of the referendum result."

Mr Hollingworth adds: "Some flattening in house price inflation since the Brexit vote may mean the rate of increase will reduce to a degree but recent indices from Rightmove suggested that the sort of smaller properties that might appeal to first-time buyers are continuing to perform strongly."

According to Mr Sinclair: "We expect London will see a small fall in prices. 

"The rest of the UK should see a gradual increase, in keeping with what we have seen for the past six months. The UK is a series of regional markets, not one homogeneous entity."

simoney.kyriakou@ft.com