LONDON – Britain’s housing market has slowed significantly in recent months, a trend that will be welcome to prospective homebuyers and less welcome to those trying to sell.
Official Land Registry data shows that annual house price growth in the UK was 5.6% in June. That may still sound like a roaring market, but growth is down from 8% this time last year.
Activity is also slowing. The Royal Institution of Chartered Surveyors (RICS)’s monthly UK Residential Market Survey described the market as “stagnant” in May.
Fresh signs of a slowdown are expected later this week when RICS releases its June report. It is expected to show a further dip in the number of members reporting house price rises.
Much of the focus has been on what’s happening at the top end of the market – expensive London boroughs, for instance, which have seen sharp price falls since the Brexit vote. Although the slowdown has been sharpest in the capital, a softening has occurred across the entire country.
What’s slowing the market?
1. Brexit – ‘That makes people more reticent’
The result of last year’s referendum on EU membership appears to have driven down the number of people moving house. UK housing transactions in the second half of 2016 fell by 9% compared to the same period a year before, according to HMRC data.
Lucian Cook, head of residential research at Savills, said a combination of stagnant wage growth and political uncertainty linked to the Brexit vote is impacting buyer sentiment.
It is partly about household finances, and partly about earnings potential and job security
“When we talk about Brexit uncertainty, it’s not necessarily the fact we’re leaving Europe, it’s the impact that might have on the economy [which is damaging buyer sentiment],” he told Business Insider.
“It is partly about household finances – which are getting squeezed by higher rates of inflation – and partly about earnings potential and job security going forward which there’s clearly a bit of caution about,” he said. “That makes people more reticent.”
Nick Whitten, residential research director at FTSE 100-listed property firm JLL, said UK house price growth had eased but emphasised that the housing market was still buoyant.
“The market began to slow in the immediate aftermath of the EU referendum in June 2016 and has continued to weaken ever since,” Whitten told BI. “However, the growth is still above inflation and in this low-interest rate environment is higher than returns you would get from many other types of investment.”
UK house price growth, May 2016 to June 2017
2. Mortgage constraints – ‘Regulation is designed that people don’t overstretch themselves’
Despite the historically low interest rate mortgages on offer, the number of home loan approvals slid to a seven-month low in April, according to Bank of England data.
Changes to mortgage lending rules make it increasingly hard for buyers to overstretch themselves and Cook said the constrained environment for mortgages would continue to dampen price growth.
“There are two things that are going to fundamentally shape the UK market over the course of the next ten years: Mortgage regulation and interest rates,” he said.
In 2014, the Bank of England introduced rules which ensured banks could only make 15% of mortgages on their books more than 4.5 times the borrower’s salary.
“Mortgage regulation is designed that people don’t overstretch themselves. But what it does is cap the amount people can borrow relative to their income, and what that does is keep deposits high for first-time buyers and for home-movers generally,” Cook said.
Cook argued in January an interest rate rise, which forecasters expect as soon as 2018, would act as a drag on house price growth. The 0.25% interest rate currently set by the Bank of England means that average mortgage interest payments are relatively small at £3,625 annually. A hike would push them up significantly, reducing affordability.
“Each 0.25% interest rate rise will add £297 to the average annual amount of interest paid by a mortgaged home owner,” he wrote.
Cook said both factors could act as a “drag” on house price growth.
What’s next for the market?
Both JLL and Savills predict that the average UK house price will grow by 13% by 2021. A failure to build enough houses, a lack of housing stock, and a rapidly ageing population are going to prop up demand, Whitten says.
“A fundamental driver of the market is that we build close to half of the number of homes we need for our growing and ageing population,” Whitten said.
“Around 15% of the population is currently aged over 65. That is expected to rise to around 25% by 2030. Put simply, that means people are staying longer in homes and not freeing up stock to the market.”
Cook and Whitten said there had been a noticeable shift in government policy towards building more homes for rent, following decades of “obsession” with owning homes.
“In terms of political ideology, the big shift [recently] has been less of an obsession with home ownership as the sole root of financial security,” Cook said, describing the move as “incredibly welcome.”
Whitten said: “Until recently we’ve had a focus on solely building homes for ownership in the UK. While that is obviously a significant piece of the overall picture, it has been overlooked that there are other ways to live as well.”
“We build around 150,000 homes across the country [annually] and most of those were built for either private sale or affordable housing.
“It will definitely be the case that the private rental sector is going to get more buoyant in the UK, which we welcome as an industry in terms of increased regulation and providing another viable housing tenure for those unable to access homeownership,” he added.