In late 2012, as we finalised our forecast, prices in the UK were flat or slowly falling, with the notable exception of central London.
Everything made sense. London had been buoyed by a stronger economic revival compared to the UK, and flows of wealth from domestic and international investors contributed to the outperformance. At the same time the new 7% £2m+ stamp duty rate had knocked sales volumes, and signals from the market pointed to price growth in prime central London slowing down, and we pencilled in 0% price growth for 2013.
In the UK, we felt the market’s weakness was justified by real affordability constraints. How could prices rise when real incomes were falling and mortgage market access was still limited to the equity rich? We forecast -2% for 2013.
And then everything changed. The 2013 budget saw the launch of Help to Buy, which, as we examine later in this report, has had a dramatic effect on market sentiment, far beyond the thousands of transactions it is directly supporting. At the same time the UK economy surprised to the upside, growing more strongly than most economists had expected.
By the second and third quarters of 2013 both the economy and the housing market were improving. Although, in the case of the housing market, outside London and South-East England the improvement was still only just noticeable.
Our latest forecast, as set out in this document, takes account of the changes in the economy and government support. We have been persuaded that growth in 2014 and 2015 will be substantially higher than inflation. However we have maintained our view that over the long term, while nominal and real price growth may remain positive, house prices are likely to rise more slowly than earnings for at least a few years after 2016.
It also seems clear that the long awaited “ripple effect” has come into play. We see prime London delivering weaker growth than the wider market over the next two years, before reasserting its outperformance from 2016.
For first time in five years we can be broadly positive about the UK housing market.
Price growth is encouraging transactions, contributing to labour mobility, and first time buyers are able to access the market in a way they couldn’t even 12 months ago. Importantly these improvements are not limited to London, they are spreading.
There is however a flip-side to these improvements. Rising prices in the short term will limit longer term growth. The fact remains that pricing in the UK is high in historic terms, and while the government can encourage activity over the next two to three years, it can not change the fundamentals surrounding market affordability, especially as the ‘special factors’ of low interest rates and government interventions start to unwind.
