Prospects for the UK housing market and house prices

It is hard to keep housing and property out of the news in the UK. In the run-up to the Brexit referendum there was the announcement from Chancellor George Osborne that house prices would fall by 18% is the UK voted to leave the European Union. As the UK did leave we will find out whether that was accurate or more like his forecast that interest-rates would rise which faces a reality of ever lower Gilt yields. Yesterday the UK issued a 5 year Gilt at a yield of 0.38% which was both an all time low and below the Bank Rate of 0.5% which gave a clue as to where the wind is blowing. Here is some news on the front from the Guardian.

The lowest 10-year mortgage rate on record is set to be launched on Friday….Coventry Building Society is to offer a rate of just 2.39% for borrowers willing to fix their loan for a decade.

There has been an effect on commercial property funds where 5 others have followed Standard Life in declaring a suspension usually of 28 days. If we look back we see that they had previously had such a good run that they were vulnerable and of course under a thinnish veneer they are always illiquid. Unless you can sell a shopping centre or mall quickly and those of course poses the questions of to whom  and at what price? Also as soon as one went the others were likely to be like dominoes. Should it go very wrong then a familiar crew will be left holding the baby. From Bloomberg.

The major banks have 69 billion pounds of exposure and smaller banks and building societies hold the remaining 17 billion pounds.

According to the analysts quoted this is a sign of success, a view unlikely to be shared by those owning bank shares.

House Prices

Today has seen an intriguing set of data from the Halifax.

House prices in the three months to June 2016 were 1.2% higher than in the three months to March 2016….Prices in the three months to June were 8.4% higher than in the same three months of 2015 .

Actually they rose by 1.3% in June itself which did not show much sign of pre Brexit referendum nervousness. I also note that the thoughts and indeed for first time buyers hopes of house price falls after the changes to Buy To Let stamp duty in April have so far failed to happen.

It is quite extraordinary that house prices have maintained annual growth which even at a slightly lower annual growth rate of 8.4% is way ahead of wages growth (2%) or economic growth (~2%). Looked at like that not only would a period of decline not be a disaster more than a few would see it as good news. Along the way we have seen the first time buyer earnings to house price ratio go back above 5. Sadly it is no longer available but must have got worse.


The latest monthly Economic Review has a section which looks as though it has been written by someone who have been living in a cave for quite some time.

Generally, house prices grew strongly in Great Britain before the economic downturn.

I am also not sure about the use of Great Britain when they say they use data from the property service of Northern Ireland but let us carry on.

there has been resurgence in recent years.

However we then get an analysis of the relationship between their data for wages and house prices since 2005 and as you can imagine my eyes lit up at that. So what do they tell us?

Before the 2008 downturn, the annual percentage change in house prices was higher than annual weekly earnings in the UK.

That is hardly news on here but let us bring this more up to date.

From 2012 to mid-2013, annual changes in house prices and annual weekly earnings remained similar; since then, house price growth has outstripped earnings growth……Affordability has decreased in recent periods, with annual house price inflation at 8.3% in April 2016, while the annual increase in earnings was 2.5%

Oh and the ONS has slipped away here from the official view which is that lower mortgage rates has improved affordability. If we move to the ratio between house prices then we see that we are almost back to what was supposed to be one of the causes of the credit crunch.

Prior to the economic downturn, the house price to earnings ratio in Great Britain followed an upward trend due to strong house price growth outstripping wage growth, with the average house price up to 8.5 times the average wage at an annualised level in mid-2007……..The ratio did not markedly increase until late 2013, when a resurgence in house price inflation and relatively slow growth in AWE caused the ratio to increase from 7.2 in August 2013 to beyond 8.0 after August 2015.

It will be above 8.1 in May 2016 if their numbers follow the same pattern as the Halifax/Markit series. Please note the use of the number 8 which replaces the number 5 used for earnings if you look at individual rather than joint numbers. Makes a difference does it not?!

Figure 21- House price to earnings ratio for Great Britain

Some of this represents the London effect which has pushed the average numbers higher and there are clear regional differences as for example North East England has become more affordable. There is a data swerve used here for which I apologise on behalf of the ONS but we get this if we switch to annual wages data (ASHE) which is only up to April 2015.

London continued to be the least affordable region in the 2014 to 2015 financial year, in which the house-prices-to-earnings ratio was 9.2. In the North East, the ratio has declined sharply since the economic downturn and stood at 4.0

What next?

I would expect the following to take place. Firstly some deals will be stopped due to uncertainty and on an anecdotal level someone told me they were doing that only yesterday although theirs was a wait and see approach. So volumes will take a dip as will  at least some prices. Again at this stage such news is anecdotal.

Not convinced this is true in London. Agent rang yesterday with a post Brexit 10% reduction…and sounded desperate. ( @beachcomberpage )

Added to that might be  foreign owners who are facing currency losses and fear property price losses as well and in a way this was reflected by UOB of Singapore stopping lending for London mortgages last week. Although the 11 quarters in a row of falls in house prices in Singapore was no doubt also a factor.

On the other side of the equation is this from the Guardian.

The plunge in sterling following the UK’s decision to leave the EU has prompted a flurry of interest in luxury homes in  London from overseas buyers, who stand to save about 10% of the cost of buying a £1m property, a property consultancy has claimed.

The caveat is of course “a property consultant has claimed” and I note the intriguingly named Mr. Cleverly has quoted the changes in UK Pounds when surely foreign buyers would be interested in the price in their currency. But for new buyers the currency fall is true.


We find ourselves in a time of heightened uncertainty looking at a UK property market which has become increasingly unaffordable to domestic buyers. There is a nuance here which is that this is massively true in London and influences the area around it. It is less true in the North of England for example where prices have at least adjusted to some extent to weak wages growth.

If we look at the Bank of England which lit the blue touch-paper for the subsequent house price growth with its July 2012 Funding for Lending Scheme then I expect a response next week. It may be too early for a more technical response such as a new rebadged FLS aimed at small business in theory but boosting mortgage lending in practice but a Bank Rate cut and more QE have been heavily hinted at by Bank of England Governor Mark Carney. So the band seems set to play on as we wait to see if they are on the Titanic or not.

Meanwhile let me offer you some insight on HSBC from @DavidKeo of the FT.

this price move may be in either direction

It was about the UK Pound £ and of course they missed the possibility it would be unchanged.

Oh and whilst there may not be many of these there will be some. What about those with a UK property but a mortgage in a different currency?

Don’t mess with Mario

The Slovenian police have upset Mario Draghi by raiding the office of the Slovenian central bank. Apparently when Mario told us that the ECB was a “rules based organisation” he did not mean the rule of law. In response here is the new ECB theme song featuring MC Hammer.




27 thoughts on “Prospects for the UK housing market and house prices

  1. Before the Brexit vote, we were promised Armageddon. We apparently would have to raise interest rates to protect the pound, which would then crater house prices. It seems to me that the great Carney has decided that house prices are much more important than the pound…No-one even seems to talk about interest rate rises now. It seems to me that house price falls are bad for the banks, but great for the young who cannot get on the housing ladder. Given that the entire establishment cares much more about the former than the (often non-voting) latter, I would take a bet that every effort will be made to avoid falls in prices.

  2. Hi Shaun
    Has MC Hammer got some of
    Draghi’s cash in those trousers!
    My son is about to move up
    the property ladder in the Reading area,
    if you look on Rightmove you will see that
    many mid-range properties have been
    reduced in the last few days , some by
    over 10%. By coincidence I have a small
    house up for auction in a week’s time(in a different area) so
    I will be able to give real world figures to
    two current transactions.


  3. What the property market needs is a bit of good old stagnation for the next ten years. Neither price rises nor falls, with a steady and modest level of transactions. Then, contiguously, we just need to let the real economy catch up a bit. One might call this a period of stability.

    What of course we will get instead is political interference and manipulation from those sat at the policy control desk. My view is this will be a massive wasted opportunity.

    • Andy, I have to disagree. Why should the young have to wait a decade or more for the possibility that their wages might catch up to house prices, (which I would wager would not ever actually happen), while the baby boomers once again get to live the high life.
      No, the sooner house prices get a good dose of reality the better IMHO. A good start would be extortionately high levels of taxation on Buy to Let properties. Pointing them out as the socially unnacceptable face of the UK housing market that they are.
      Let prices tumble and then encourage banks to lend to first time buyers only.
      If the banks dont like it then fine… nationalise them and turn their housing stock into council housing for future generations.

      • I think you rather missed the financial crisis of 2008, when billions had to be pumped into the banks due to massive black holes caused by mortgage derivatives tanking on falling prices and defaults.

      • the only baby boomers hurt are the no kids – BTL brigade

        let the banks go

        let houses reflect supply and demand – I can think of many “brownfield” sites ready for development – called golf courses

        so you just heard from a baby-boomer ( har har ) that wants his house to drop – say 50%

        Frankly it not me , its the Banks and HMG that want high prices


        PS: having to borrow on his house to buy popcorn ….

        • Baby boomers are all too old to get mortgages.
          It’s ain’t us pushing the prices up; most of us have had nothing to do with the housing bubble since 1990.

  4. I am always taken back to 1987 with this, as we approached the height of the Lawson boom, perhaps the first big housing bubble based on seriously loose credit – his previous idiocy being magnified by Big Bang that year! Working as a trainee solicitor at a major City law firm, I met up with an old university friend, who had bought a pokey flat in Ladbroke Grove right by a large council estate of flats. He informed me that I had to buy then “otherwise you will never be able to buy”. This struck me as odd, given that I was in that age/job bracket of people, who should have been near the top of the first-time buyer group. So, given that it was a pokey flat by a council estate, I didn’t think it would be a next step home, in which case, who was going to buy it when I couldn’t afford it? It confirmed my view of a housing bubble and bust, so I didn’t take him up on it!

    I also had a great-aunt in south Fulham (well, it was scruffy Parsons Green in those days), who died in the early 80s. A while ago, I saw that her house was in two flats, one of which had recently sold for £700K and the upstairs was valued about the same. The downstairs was then up for rent at £1650pcm, which makes for a gross income yield of 3%.

    I took an MBA some years ago by DL, which is handy as the university regularly extends the elective programme and so, I can bolt on any extras I like. One is Practical History of the Financial markets, where they discuss why shareholders were prepared to accept very low divis from the 1990s onwards, which were significantly below the overall average yield on shares over the past 100 years. There are two possibilities: 1) yield expectations have fallen below the long-term average – talk of “new paradigms” we all remember from 2005-7 and the late 1980s and/or 2) an expectation of capital growth to raise the overall yield to the long-tern average. In the end, of course, the income yield must essentially disappear as the capital price rises.

    Thinking about great-aunt’s house, I could see this in action. Property has risks and borrowing costs (or at least opportunity costs), so 3% is about as low as the total yield could go in a time of low returns on most safer investments. Quite clearly, the capital appreciation is the key driver. But what happens if rates rise by 2%? Then the yield should go to 5% and thus, if the rent doesn’t change, the flat will be worth about £400K (20 x the annual rent rather than 33.3x). This is how dramatic the price fall could be on a very limited rate move. Consequently, we will see more rate cuts and funny money schemes.

    Incidentally, I nearly fell off my chair laughing when Andrea Leadsom said that it was great that Barclays were committed to the UK – their shares have fallen about 40% since I worked for them 14 months ago and was offered an employee purchase scheme. Given her CV, I was reminded of the old joke: Who was the odd one out? The Gang of 4 including Fred the Shred and Andy Hornby appearing before the Commons Finance Select Committee, the chairman of that committee, the Chancellor and Terry Wogan? The answer was Terry, as he was the only one with a banking qualification.

    • Hi David

      I remember those days as I was a graduate trainee at Phillips and Drew back then and waited for the 1990s dip to buy. Whilst I can take some credit for this it is also true that there was a decent dip in prices as there has been nothing like that since in SW London. Occassional lulls but mostly up.

      As to Barclays the new CEO started in December and his plan was to double the share price whereas at 135p it is much nearer to halving. Will the next objective be a quadrupling of the share price?!

      • They really do not have a clue – really a case of the beatings will continue until morale improves!

        I was amused to see that having offered 6 month contracts followed by a steep drop in pay “but you can earn bonuses” (no, not the ones everyone moans about), they are still recruiting, but having to offer 1 year contracts to get the staff. i see Steve Priest in the distance!

  5. Shaun,
    Is FLA failure for small businesses due to crowding out by those with access to free money from QE etc?
    Would expect an increase in M&A activity if this the case as £ devalues?

    • Hi Chris

      The issue with bank lending to businesses was supposed to be the amount of capital it took up as in it required more than other types of lending. The FLS was supposed to fix that except the improvement has been minor so far.

      As to M&A activity well some UK companies must be looking cheaper to foreign buyers.

  6. Property market has been propped up restricted supply and high demand pushed higher by immigration. Rents are propped up by housing benefit, so that even sub-standard housing rents at high rates.

    Brexit may weaken both props. Brexit may cause negative nett migration reducing rental demand. Bankrupt or financially weak governments cannot pay housing benefit. Many older people will remember 10% and/or 15% interest rates -> and may consider selling to clear mortgages before a crash.

    Given the excessive rent costs in London I’m surprised at it’s continued population growth. The skilled, educated employees are generally the most valuable and the ones who find it easiest to relocate. British employers beware !

    • Hi ExpatInBG

      In one way some of the UK establishment has come crashing down. Yet it is resilient and will not doubt have plans for more of the same! After all it is all they know. As you say so many policies have boosted the housing market.

      Oh and you pose a question I have often wondered. Exactly where do those working on low wages in London live? I suspect we may not like the answer bit it is definitely better to know.

      What is the Bulgarian view on all of this?

      • There was some shock in Sofia among colleagues, and some knee jerk vitriol against Farage. Having in demand skills their ability to work in the UK won’t be affected.

        Of course there was zero discussion about how Britons pay 40% income tax compared to the high tax paying middle class in Sofia who pay 10% or the Bulgarian elite who drive 100K Mercs, BMWs, Bentleys, Lamborginis etc whilst declaring a taxable income under 5K euro PA.

        This suggests that the EU needs to take a big federal step, direct EU tax and federal tax evasion inspectors headquartered somewhere in Northern Europe with excellent transparency intl rating. To get voter referendum approval for such a power transfer – the EU would need to provide voter accountability from the EC -> and the only model I like is the Swiss rule by referendum. Politically most the heads of state hate this. Merkel has massive power. Many Southern European politicians have immunity from prosecution and live extravagantly whilst paying almost zero tax. They would hate accountability to an efficient and effective tax administration.

  7. Hi Shaun, your title is of the moment and should be a media focus for the rest of the year as people realise the Brexit referenda is no more than a botched political stunt which has revealed the utter incompetence of the City and all political classes, such was their surprise.

    If any of these elites had the slightest inkling about real life in Britain they would understand that the majority of folk really dislike an economy centred on shortages and inefficiency which is what crony Government and business is spectacularly good at making.

    It isn’t difficult to spot the artificial shortages, railways road housing parking pavement ethics power generation water schools and all of them proudly precided over by people with their palms beckoning.

    So after my Brexit rant let me focus on the housing. Im not sure that there is a shortage, properly tax the vacant and rebase the rateable valuations at year 2013 then you’ll see some squirming. Make the charitable sector, holiday homes etc pay full rates and a veritable flood of properties will come for rent or sale.

    Interest rates are important but we have to acknowledge that not only have mortgages factored rises as part of their responsible lending calculations but most risk averse home borrowers are on fixed rates until 2020 anyway. So I suggest the main reason rate are supressed is to help the crippled Govt Debt and Bankrupt Banking sector.

    Given that Govts and Banks are very motivated to keep rates low, they’ll hide excuses behind domestic borrowers but members of the Vampire Squid will be constant dialog a out how to stop the UK resorting to protecting a sterling crisis with a rate rise….

    I had hoped for a Brexit to trigger this challenge and we are nearly there, I couldn’t have forecast imploding leadership so that has stoked up the likelihood.

    My reasoning is that the Conservatives still want power but they have to carefully acknowlege the vote and the voters without actually delivering an exit anytime soon. They can’t exactly leverage the mandate they have for extreme austerity since they worry about a General Election so they have to spend more than planned and this is the rub. We have a gargantuan trade deficit and significant budget deficit and these will have to continue to keep “racist” voters happy.

    QE is the only thing to do but with a pound in the doldrums, money printing is the last thing that markets need. So we need friends overseas to suppot our currency. Those friends will be others with skin in the game. Now who needs our trading and who needs to maintain low interest rates…?

    So the Chinese will be aquiring and storing our QE, the US and Japan, even Germany (but only in secret). Arent we lucky to have the Vampire Squid as our friend?

    Paul Chadwick BSc Econ

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