_UK Housing Market Forecasts

There are several factors at play behind the recent slowdown in market activity – not least a lack of available homes to purchase. The supply of existing homes for sale through estate agents was near record lows earlier this year, while buyer demand is showing signs of rising.

This trend has increased focus on the delivery of new-build homes across the country. The number of new homes being built in recent years has risen, but still remains some way below the number needed to meet current demand – not to mention the large historical shortfall.

The shortage of housing stock available to buy coupled with ultra-low mortgage rates have put a floor under pricing across the UK, but the question of affordability is becoming more pressing in some areas, especially as lenders still expect sizeable deposits from buyers. As the UK moves closer to Brexit, any economic uncertainty could have a knock-on impact on the housing market, especially if wage growth and employment levels across the country are affected.

We have examined the key risks to the UK market in more detail in our Risk Monitor.

Prime London Sales

After several years of significant outperformance, demand in the prime London sales market has been dampened by rising transaction taxes, leading to a slowdown in sales in 2015 and 2016 and prices falling 6% in the two years to March 2017 in prime central London. The UK’s decision to leave the EU has created a degree of uncertainty, as will the pending UK General Election. However with lower asking prices and the pound trading at 14% below its level before the EU referendum versus the dollar, transaction volumes are recovering. We believe prices in 2017 will end the year unchanged in prime London and the volume of £1m+ sales in Greater London will be more than 10% higher in 2017 than 2016.

Prime Country

Higher rates of stamp duty continue to act as the biggest brake on price growth and activity in prime markets. The reforms have made buyers more price sensitive, and this is increasingly being factored in to asking prices and offers. As a result, we have seen the creation of a two-tier market where price growth is influenced by value, something which is expected to continue through 2017. The strongest markets continue to be affluent towns and cities that have outperformed their more rural counterparts in terms of price growth, although this differential is expected to narrow as buyers take advantage of the relative value now offered by more rural markets. Prime prices in the country remain around 13% below the previous market peak back in 2007/8.

Prime Scotland

Prime property values in Scotland are expected to be unchanged in 2017. Political and economic uncertainty as a result of the UK’s recent vote to leave the European Union is expected to limit price growth in the short to medium term. The continued impact of Land and Buildings Transaction Tax (LBTT) on buyer sentiment will weigh on activity and pricing. While overall price growth across Scotland’s prime markets is forecast to be muted between 2017 and 2021, we do expect to see outperformance in some key urban hubs over this time, such as in Edinburgh where the market has proven to be more resilient to recent political events and changes to taxation.

Prime London Lettings

Activity in the prime London lettings market has strengthened over the last two years due to the uncertainty surrounding taxation in the sales market. Demand is particularly strong below £1,000 per week as young professionals increasingly accept renting as a tenure model. Furthermore, corporate budgets have been tightened, which boosts demand at lower price points but means demand is weaker between £1,500 and £5,000 per week. Above £5,000 per week demand remains strong as uncertainty persists surrounding the impact of fiscal policy on the sales market. New supply has exceeded new demand due to the same uncertainty, meaning rental values have fallen in many areas, declining -4.9% in prime central London in the year to March 2017.

UK Rental Market 

UK rental growth has eased slightly to 2.1%, down from 2.6% at the start of last year, but up from 1.4% in the summer of 2014. Rental growth in London has moderated to 1.6%, down from a high of more than 4% in 2015, while average rental growth outside the capital has climbed to 2.2%, up from 1.1% in 2015, led by the South East. In Scotland, a minimal 0.1% reversal in rental growth has been reported.

Tenant demand remains strong across the market, with a continued lack of supply in many markets. The changes to tax policies for buy-to-let landlords, with the gradual withdrawal of mortgage interest reliefs between now and 2020 could prompt a re-think for some smaller property investors who may choose to sell, although at the same time a significant level institutional investment is flowing into the sector. The increase in stamp duty for buy-to-let investors is likely to dampen trading within the market, further exacerbating the lack of property for sale. The attraction of rented accommodation for those who do not want a mortgage, as well as ongoing affordability constraints signal continued rental growth as demand expands.