Rosie Murray-West has been writing about consumer money for over fifteen years, and is the former Deputy Editor of the Telegraph’s Your Money. She contributes regularly to national papers and magazines including the Telegraph and Mail on Sunday.
Global uncertainty created by the result of the Brexit vote and the election of Donald Trump has made it more difficult than ever to predict the future direction of house prices in the UK.
After a period of strong house price growth, some experts now believe that property values could stagnate, or even fall, while others point to limited supply in the market and continued low interest rates to suggest that prices could continue to rise fast.
House prices have remained buoyant up to now
Recent house price performance
Despite gloomy predictions in recent years, house prices have remained buoyant up to now.
The government’s Office of Budgetary Responsibility (OBR) says that house prices rose 7.6 per cent in 2016. In the first quarter of 2014, house prices were growing at over eight per cent, and there hasn’t been a quarter when they have decreased in value since 2012.
To put this in context, five years ago the average property price for the UK was £116,000 according to Land Registry figures. Now it is £218,000, which represents eight times the average annual salary.
The rise has made it increasingly difficult for first-time buyers to get onto the property ladder, and for so-called ‘second steppers’ – those trading up from their first small property to a larger home suitable for a family – to make the next move.
The average property price has increased from £116,000 to £218,000 in five years
Why prices have risen
House price growth has outpaced inflation in other areas for a variety of reasons. One of the most important is the fact that, although the number of households in the UK is increasing, we are not building enough homes to keep pace.
The number of new households each year has exceeded the number of homes built in every year since 2008, and the gap between the two has widened in recent years.
This lack of supply, which pushes up prices, has been compounded by interest from investors, who often have deeper pockets than other buyers. The most recent statistics from HMRC suggest there are well over 1.75 million landlords in the UK.
Low interest rates and changes to pension legislation have added to Britain’s army of landlords, with many choosing to buy property as a steady retirement income because income from other sources is hard to find.
To add to this phenomenon, overseas buyers have been snapping up UK homes to rent out for income, partly because of the strong housing market and partly because of the UK’s reputation as a stable place to buy.
New figures from Savills show an estimated £1.9 billion was spent by foreign investors on regional UK property in 2016, almost double 2015 levels.
Although there are no official figures on how much of the UK’s residential property is in overseas hands, Savills estimates that 32 per cent of the prime London market comprises overseas buyers.
What is happening now?
Recent figures from various expert sources suggest that house price growth is finally beginning to slow down. Rightmove, the online property service, said recently that UK house prices are growing at their slowest rate for four years.
Rightmove, which measures the amount that sellers ask for their homes, rather than the amount that is finally paid for them, said that the rate of annual house price growth was 2.3 per cent in February, which is the weakest it has been since April 2013.
House price growth seems to be slowing down
Halifax, which also produces an up-to-date forecast of property prices, said that prices increased by 5.1 per cent in the year to February, the lowest rate since July 2013.
Economists attribute the slowdown to a variety of factors. One of those is a deliberate government policy, aimed at making the buy-to-let sector less attractive to investors.
By increasing stamp duty for second homes and decreasing tax relief on mortgage interest for buy-to-let investors, the government hopes to remove some of the competition for first-time buyer homes.
There is already evidence of this having an effect, with data from the Council of Mortgage Lenders showing a 21 per cent decrease in the number of buy-to-let mortgages in December 2016.
What could happen next?
While economists have different views on the future direction of house prices, most seem to agree that house price growth will slow.
Howard Archer, chief economist at IHS Markit says that house price gains over 2017 will be no more than three per cent, “and could well be less”.
Economists have different views on the future direction of house prices
Robert Gardner, chief economist at Nationwide, forecasts a two per cent rise, while the government’s own Office of Budgetary Responsibility forecasts that the rate of increase will drop from around six and a half per cent in 2017 to four per cent in 2018.
Experts give varying reasons for the slow growth. Mr Archer points to weakening consumer confidence, which means that many people will delay making major spending decisions. However, he points out that there is still a shortage of supply of housing, meaning that prices cannot fall far.
Mr Gardner says that rising inflation, caused partly by Britain’s preparations to leave the EU, would eat into consumer spending power and would push down prices.
“In our view a small rise in house prices of around 2 per cent is more likely than a decline over the course of 2017, since low borrowing costs and the dearth of homes on the market will continue to support prices,” he says.
Interest rates are expected to remain low for some time, which also supports house prices, as customers can afford to pay larger mortgages. Meanwhile the weakness of the pound, which fell in value dramatically against other currencies after the Brexit vote, may encourage further landlords from abroad to invest in the UK, supporting prices.
The regional picture
The rate of house price growth in recent years has masked disparities between the various regions of the UK.
There are disparities in house price growth between the various UK regions
According to the most recent government figures, the East of England saw the biggest house price rises between December 2015 and December 2016, with an 11.3 per cent increase in house prices in that time. That contrasts with Scotland, where house prices rose just 3.5 per cent.
However, according to estate agency group Savills, which produces regional property predictions, some of the best performing regions in recent years will miss out on future growth, and other areas may see falls in prices.
Savills is forecasting a 2.5 per cent fall in property prices in the North East in 2017, while those in Scotland could fall a further 2.5 per cent.
Savills blamed the effect of Brexit for the changes, which it says will shift the strongest growth to outside London and the South East. The Royal Institute of Chartered Surveyors (RICS) also believes that former high performing regions such as London will stabilise. RICS says that East Anglia, the North West and the West Midlands will record house price gains above the national average.
Average house prices by region, and Savills’ property price forecast by region, are shown on this map.