House price growth and housing market activity in general have slowed significantly in the first half of 2017 – and Brexit is probably a root cause.
Despite unemployment falling to 4.4 per cent, its lowest rate for 40 years, UK household finances are under pressure. This is partly due to the fall in sterling, which the Bank of England (BoE) describes as having “depreciated sharply” since the EU referendum.
As a result, import prices have risen, eroding UK householders’ purchasing power. Their spending on large items such as cars, homeware and electrical goods has slowed. Inflation rose to 2.9 per cent in September and the BoE expects it to peak at 3 per cent next month.
Figures from Nationwide Building Society show that house prices continued to slow in August. On an annual basis, growth fell from 2.9 per cent in July to 2.1 per cent in August. This is in comparison to annualised monthly growth of about 4-5 per cent in 2016.
The BoE attributes some of the weakness in housing market activity to the tightening of the rules concerning buy-to-let lending. It says the BTL slowdown has been particularly pronounced in London and the South East, which account for about 50 per cent of these transactions.
The most recent falls in house prices and activity reflect a drop in the number of homemovers and first-time buyers (FTBs) as demand has softened in many parts of the UK. Nevertheless, this more widespread slowdown is likely driven by the same factors prompting weak consumer spending.
Weak productivity
Wage growth remains subdued, despite the fall in unemployment. Weak productivity growth is partly to blame, but uncertainty about the economic outlook is a factor.
Firms are reluctant to raise wages until they have more clarity about future demand, the BoE suggests. It also believes that despite high employment and higher inflation, householders’ concerns about the economic outlook have left them “reluctant to push for faster pay growth”.
The central bank has forecast that wage growth, and consequently house price growth and housing market activity, will remain subdued for the foreseeable future. The housing market, it explains, tends to be linked to consumption activity and driven by household confidence and income expectations.
Property transactions have averaged about 100,000 a month since the beginning of the year and are expected to remain at that level. House purchase approvals have also plateaued. In May, the BoE forecast that approvals would be about 71,000 a month; it has now revised the figure to about 66,000 for the remainder of the year.
Prices buoyed
Most recent housing market activity has been driven by FTBs and those remortgaging. The BoE points to rising demand for new-build properties under the Help to Buy equity loan scheme as evidence of FTB activity.
By contrast, UK Finance suggests many homeowners are struggling to move so have not put their properties on the market. This contributes to the shortage of homes available for sale, which helps to buoy prices, which is confirmed by estate agents reporting that the number of properties coming onto the market is continuing to fall. Housing demand is also supported by the fact many mortgage rates remain at record lows. So although growth has slowed, trade body UK Finance points to a supply/demand imbalance that continues to underpin house prices.
Nationwide has reported that house prices are 12 per cent higher than their peak in 2007, with prices in London and the South East significantly higher than in 2007.
As prime minister Theresa May and her government stumble through Brexit negotiations, uncertainty about the outcome endures.
Nationwide has predicted that the pace of growth in the market will continue to slow over the course of the second half of the year, “dampened by a potentially more challenging outlook”.
