What are the prospects for UK house prices?

This year has the potential to be one where there are ch-ch-changes in the UK housing market. What I mean by that is that the rise in house prices looks set to fade and be replaced by house price falls. Even the estate agent sector has shifted to suggesting only minor price increases and of course they have a large moral hazard of never being keen to forecast price declines! Back on November 4th last year I offered a critique of this as Savills told us this.

London tenants face a 25 per cent increase to their rents during the next five years, said Savills, the listed estate agency group. Renters elsewhere in the country will not fare much better, it said, with a predicted 19 per cent rise.

They were telling us this in my opinion because otherwise the forecast below would not do business much good.

Savills said (house) prices would be flat in 2017 in the capital and elsewhere…

Actually as I pointed out on the 8th of December house prices in central London had already gone from the only way is up to fallin’.

On Monday, property firm Knight Frank said prices in prime London postcodes had fallen by 4.8% in the year to November, and were set to end the year 6% down. In Chelsea, prices have dropped by 12.6% over the past year, it said, while around Hyde Park values are down by 11.2%. It forecast that across the market prices will remain flat in 2017.

I plan to cycle past the large Nine Elms development later which stretches from Battersea Dogs Home to Vauxhall and includes the new American and Dutch embassies and it will provide food for further thought. I would like to know for example the exact numbers behind this being reported by the Foxtons estate agency.

Property prices in Nine Elms have increased by 3.58% over the past year.

Should someone want to take the advice of Blur below there are also challenges ahead.

City dweller, successful fella
Thought to himself oops I’ve got a lot of money
I’m caught in a rat race terminally………….

He lives in a house, a very big house in the country

That plan seems to have trouble ahead if this from KnightFrank is any guide.

Prime country property values fell by 0.4% between October and December, the third consecutive quarter in which prices have fallen……As a result values ended 2016 marginally lower, falling by around 0.4% on average compared with the 12 months to December 2015.

Will this spread wider?

I think so although there are different issues as we move from prices which are in effect set internationally these days to ones which are much more domestic.

Inflation and hence real wages

The likely trend for real wages is down this year and that will pose its own problems for house prices and affordability. We got quite a strong hint from Germany yesterday as shown below from Destatis.

The inflation rate in Germany as measured by the consumer price index is expected to be 1.7% in December 2016. Compared with November 2016, consumer prices are expected to increase by 0.7%.

As you can see there was quite a pick-up and whilst there are domestic issues the international ones will be stronger for the UK because the UK Pound fell against the Euro overall last year. Accordingly unless wages can increase we will see real wage falls in 2017 in the UK putting a squeeze on budgets.

Mortgage Rates

Last year we one of record lows for mortgage rates in the UK as the Bank of England under Governor Carney added further to the measures reducing them. The ongoing £60 bank mortgage lending subsidy called the Funding for Lending Scheme (FLS) found itself accompanied by a 0.25% Bank Rate cut, an extra £60 billion of QE ( Quantitative Easing) and some corporate bond QE. Thus Mark Carney and his colleagues had a go at emptying the house price support cupboard. Actually they also added the Term Funding Scheme to give another bank subsidy which so far has provided some £20.7 billion to them.

But the winds of change have blown as we note the international trend to higher bond yields and hence mortgage rates. This has been led by the impact of the expected policies of President-Elect Trump and the December interest-rate rise of the US Federal Reserve. As ever the short-term picture is complex as a bond market rally at the end of 2016 was followed by falls this week but the UK ten-year Gilt yield was driven down to nearly 0.5% by the “Sledgehammer” of the Bank of England is now 1.32% which gives the bigger picture of rises. Also it means that our “dedicated follower of fashion” Mark Carney picked an out of date line.

Government policy

This has shifted in a couple of ways. Firstly we saw changes in Stamp Duty on second homes then we saw changes in affordability criteria for buy-to-let mortgages. In April we will see tax relief on mortgage interest payments reduced to being only at the basic rate as well. More generally much of the Help To Buy policy ended with 2016.

We do not know how the new government would respond to house price falls but so far it does not seem as obsessed with the housing market as its predecessor.

Starter Homes

One area where the current government is following past policy is in the rehash and reannouncement of the Starter Homes policy and the announcement of the new Garden Villages. The simple truth is that governments of all types in the UK have made loads of similar proclamations but very little extra building if any has actually taken place.

Today’s data

The latest Bank of England numbers show that the market is trying to hang on in there.

The number of loan approvals for house purchase was 67,505 in November, compared to the average of 64,178 over the previous six months…….Lending secured on dwellings increased by £3.2 billion in November, broadly in line with the average over the previous six months. The three-month annualised and twelve-month growth rates were 3.0% and 3.1% respectively

That would not be far off a steady as she goes position if we missed that this was for November and so the main changes are still in the future.

Unsecured credit

Here we find yet another side-effect of the housing friendly policies of the Bank of England. Please do not adjust your sets and I hope you are sitting comfortably.

Consumer credit increased by £1.9 billion in November, compared to an average monthly increase of £1.6 billion over the previous six months. The three-month annualised and twelve-month growth rates were 11.4% and 10.8% respectively.

This is a clear consequence of the Bank of England opening the monetary taps and in the past has led us into trouble. We do not get a breakdown of what the lending if for but I believe a lot of it goes into the record numbers for motor car registrations. Although I do recall the claim a while back that this was in fact secured credit. An odd description where the first drive alone is accompanied by a boot full of depreciation.

Comment

We see that it is not just the weather which is producing some chill winds right now as the outlook for the housing market is the same. Not perhaps the plummet predicted by our £30,000 a speech former Chancellor but a fading then stagnation then fall. Even the Consumer Price Index is likely to exceed house price growth this year.

However I am someone who would welcome a phase of mild house price falls. Why? Well the official house price series explains as I note that an average house price of £150,633 in January 2005 was replaced by one of £216,674 last October. There are of course many regional differences with Central London leading and Northern Ireland lagging but overall we see an asset price which has completely decoupled from the real economy. Of course this is Bank of England policy and an area where I strongly disagree with them. Actually as this from Mark Carney implies they are trying to have their cake and eat it.

Moreover, rising real house prices between the mid-1990s and the late 2000s has created a growing disparity between older home owners and younger renters.

Why have you pushed them further up then Mark?

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20 thoughts on “What are the prospects for UK house prices?

  1. Hi Shaun
    Prices are bound to go down, as I have just bought a property!!
    It is a huge pity that, in this country, houses are seen as a source of wealth, rather than a place to live in. Phrases like “getting on the housing ladder” really stem from the whole premise that prices are just bound to rise.
    A few points that I would make:
    1. The huge increases in stamp duty are likely to have two effects. First, they tend to reduce volume of sales per se. Secondly, very serious inflation has to occur even to break even – I was mulling this when selling a flat this year and tried to work out what the NEXT purchaser would have to pay for my buyer to break even. This could further erode the willingness of people to move.
    2. There are a lot of secondary effects of house price inflation, some of which are beneficial. Whole areas can be renovated when prices rise (I lived in Clapham when houses cost £50k and were in very poor condition..), which presumably helps all local trades. In terms of the housing market seizing up because of stamp duty, I believe that volume of sales has huge effects on such items as carpet/dishwasher sales etc.
    3. Won’t the banks all go (more) bust if house prices fall?
    Overall, I would say that the housing market is just another one of the plates which they are desperately trying to keep spinning until that can is out of sight down the road.

    • ” Won’t the banks all go (more) bust if house prices fall?”

      no no no , all our Banks have past strict stress tests

      and you can be assured they all past with flying colours so there will be no problem like Banca Monte dei Paschi,

      ever

      again

      (silence)

      um, maybe

      or maybe not

      no no , never……

      I’m assured by the support of the ECB …. erm….

      Forbin

      PS: Yer can take ma gold, silver and bitcoins but yer never take ma popcorn!!

      • How careless of me to forget the stress tests!! I had forgotten that the entire banking system is a solid rock on which we can depend for the rest of our lives.
        As a matter of interest, does anyone know if Monte dei Paschi is still paying bonuses? I assume so or it “will lose the talent”.
        Presumably we are due for another “it couldn’t be foreseen” moment when, astonishingly, the current bail-out turns out to be insufficient…

  2. Consumer Credit ” I believe a lot of it goes into the record numbers for motor car registrations”.

    I thought they were all leasing new cars (except for me) and that would not show up as increasing consumer credit – unless they are borrowing the necessary deposits?

    • Hi Peter

      We do get the occasional hint of what is going on. For example this was in the UK SMMT report on the new 66 plate sales.

      “many are taking full advantage of the attractive deals and low interest financing options on offer.”

  3. Hi Shaun and hope you have a good 2017!
    Being involved in property development, the time it takes to go through the planning process is unbelievable. The announcement of these “garden villages” whatever they are, is just that, an announcement. If these ever do happen, don’t expect a completed house capable of being lived in, for probably 20 years. As you say we have had these initiatives time and time again, without anything ever happening. The last big new town/city was Milton Keynes 1960s!

    Debt is out of control and nobody is doing anything about it, falling house prices, falling real wages, higher mortgage payments and rising inflation is going to be the theme for 2017. If I had a huge mortgage on a London or South East property, I would not be sleeping at night.

    Happy New Year to all your Readers!

    • “Debt is out of control and nobody is doing anything about it”

      I disagree , sadly they are adding as much as they can to it …..

      😦

      Forbin

  4. Hi Shaun
    I accept that london prices are
    falling and that all other prices should
    logically fall as well, but:-
    1) TPTB will continue to move hell and high
    water to keep prices at the very least where
    they are.
    2) The obvious situation of low new house
    builds will continue to control prices, it’s
    simple supply and demand.
    3)In any city or large town in the country there
    will be a few desirable areas with very little
    choice on the market. thereby strengthening
    prices.
    4)Although wage rises are historically low it
    has not had much effect yet, has it?

    My son and his partner are currently
    purchasing a property and have paid more
    than the asking price because they were
    previously gazumped twice as in point 3, they
    have also chosen to wait before they put there
    flat on the market because there is currently
    nothing comparable on the market.

    So if anyone currently wants to buy in a desirable
    area listen to Bad Finger

    JRH

  5. Hi
    Good article

    I not convinced house prices will full. our politicians seam to be amazingly inventive when in comes to subsidising house prices.(Help to buy isas etc)

    just got to look at the starter home discounts 20% discount on a 400k home in London is 80k.

    • Hi Thepessimist

      So far it is true that the UK establishment has so far been willing to undertake measure after to measure to first get house prices moving on up and then keeping them rising. So far the Bank of England has kept that up but it now faces the issue of rising interest-rates in the US and the new government has let much of Help To Buy expire.

      I think the best scenario would be for gentle price falls as anything more severe would lead to even more measures.

  6. Hi Shaun good and timely article.I had been thinking about a buy to let and had my eye on a flat which came on market last April at £115000 in June it dropped to £109,950 then in September £99,000 dropped again in December to £95,000.
    The young people coming up do not have the incomes or job security of previous generations,credit is keeping the boat afloat but for how much longer?
    Prices must fall don’t know how London is able to function.
    The damage rising house prices have done to the economy is criminal,this has only occurred through the greed of bankers,the stupidity of the population and the encouragement and acquiescence of the educationally limited politicians that we elect to look after our interests.

    • I considered this if I started work today

      1, I ‘m forced to pay for a pension straight away

      2, I have Uni fees to pay off as all the Tec colleges are now “Universities ” and they charge an awful lot

      3, As fast as I save up the prices go up

      4, What I can buy is a flat but theres ground rents as well as maintenance fees

      5, apparently I cannot do without a £500 Smart phone that cost £360 a year to get service ( and upwards)

      6, Broadband at a round £400 and upwards or I’m stuck in loser-ville ( no face book)

      7, I’m paid a lot less , if at all , in the so called “gig” economy , or is that “gig” poverty ?

      and of course automation will take away the high paying jobs and there’s plenty of cheap labour around – see “gig” poverty

      conversely if I can set my own company up with a good idea I can be on the gravy train but lets face it , for the most of us, thats not going to work out is it ?

      Forbin

    • Do I see the words “criminal”, “greed” and “bankers” in the same sentence? You should be ashamed of these malicious words to the creators of our wealth struggling away to make ends meet. Do you have any idea how much a private plane/yacht costs to run? These noble servants should be knighted (oh, they are) and paid commensurately with their skill set and contribution to society (oh, hang on, that can’t be right…) or the world come to an end!

      • I am ashamed ……..that I did not use much stronger more colourful and appropriate language to describe those responsible for wrecking our economy and the futures of our young people.
        As you say they need to be rewarded or they might be lured abroad …we would not be that lucky.
        On exorbitant salaries just saw that the Fox News anchor woman who was involved in that spat with “The Donald” ,Megan Kelly has just left old Ruperts channel for NBC fo $20M a year …obscene doesn’t come close.

    • “…acquiescence of the educationally limited politicians that we elect to look after our interests.”

      In a democracy the electorate gets the “leaders” it deserves/voted for..

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