Economic outlook
Growth in the UK economy is expected to be around 1.8% this year, falling to 1.2% and 1.5% in 2018 and 2019 as domestic consumption falls and trade fails to compensate sufficiently even though overseas markets are reviving. (EY Item Club Spring Forecast, April 2017)
Households used savings and credit cards to increase their spending last year, pushing the saving ratio down to the lowest levels since records began in 1963 and pushing non-mortgage borrowing to high levels. Consumer spending now looks set to fall in the face of inflation (expected by the Bank of England to reach 2.7% by early 2018) and tighter loan criteria following an FCA investigation into lending. The minutes of the Bank of England’s Monetary Policy Committee March Meeting noted:
‘Measures of overall activity growth have been resilient, with official estimates indicating a fairly steady pace of expansion around historical average rates and business surveys suggesting little change in the near term. It is possible that slowing consumption may be offset to some degree by other components of demand, such as a more supportive net trade position following last year’s fall in sterling and the recent pickup in global momentum.’
The Bank is widely expected not to increase interest rates from their current historic low of 0.25% until at least 2018 while inflation is expected to overshoot its 2% target by then before drifting back down.
Unemployment has fallen to its lowest rate since early 2005 (ONS) but average weekly earnings growth has remained weak, at 2.2% in January when larger rises would be expected with unemployment below 5%. Retail sales have been contracting and wages are expected to continue to stagnate.
Property Market
On 13th April RICS issued a downbeat assessment of the UK housing market, reporting that ‘new buyer enquiries and agreed sales [remained] stagnant in March’ for a third successive month.
This is in contrast to the CML’s Market Commentary issued in March 2017 which noted that transactions in February 2017 were above 100,000 for the second month in a row. The CML notes that with 340,000 first time buyers in the year to January, this group is larger than at any time since early 2008, indicating that government support is filtering through. Home ownership by 25-34 year-olds hit a low of 36% in 2014 and has risen slightly in recent years to 38% but is still much lower than ten years ago when it stood at more than 55%. The next age bracket (35-44) also saw a decline in ownership in the decade to 2016, from 74% to just 56%. (DCLG)
Prices are strong and rising outside London and stock levels are at record lows ‘as the number of properties coming to market continues to decline’. (RICS) The East of England is the region which showed the highest annual growth, with prices increasing by 10.3% in the year to February 2017. Growth in the East Midlands was second highest at 7.5%, followed by the West Midlands at 7.0%. The lowest annual growth was in the North East, where prices increased by 2.2% over the year. London average prices have fallen slightly in recent months by at over 4% year on year. (ONS, February 2017 UK House Price Index)
Economists at the University of Reading have forecast that house price inflation will continue to outstrip wage growth so that first time buyers will need to rely on windows of opportunity created by periodic slumps in the housing market.
Commenting on the February House Price Index, Richard Snook, senior economist at PwC observed;
‘While good news for existing homeowners, however, this further rise in property prices – at four times the rate of consumer price inflation and more than double average earnings growth – will take home ownership even further out of reach for Generation Rent.
‘The good news for prospective future buyers is that we do expect a gradual slowdown in house price inflation in 2017 with our scenarios ranging from between 2% and 6% growth. There are several headwinds affecting the housing market over the next couple of years: uncertainty related to Brexit, rising consumer price inflation with consequent downward pressure on real earnings growth and, in the longer run, the potential for a supply increase due to initiatives in last week’s White Paper.’
The Housing White Paper published in February proposes an ambitious measures to increase new building, giving local authorities, developers, housing associations and others new powers, accountability and funding, and simplifying the planning process to increase the housing stock with the aim of bringing down the price to earnings ratio.
The CML reported that lending is increasingly being driven by remortgage activity, which ‘grew over 20% over the last twelve months’ (CML), fuelled no doubt by extremely low interest rates. (The Bank of England reported a February average of 1.42% for a two-year fix with a loan-to-value ratio of 75%, the lowest ever.)
Impact of Brexit on the property market
RICs reported in March that 8% (or 176,500 people) of the UK construction workforce comes from the EU outside the UK. The body warned that inability to hire from outside the UK would harm an industry already facing skills shortages and ‘jeopardise a predicted £500 billion infrastructure pipeline’. This worst-case scenario may not come to pass in view of current discussions about ensuring access to workers for key sectors.
Policy developments
Although the Housing White Paper has been published, the promised white paper on reform of the home buying process has not emerged. Responsibility for it has been passed from the Department for Business, Energy and Industrial Strategy to the Department for Communities and Local Government. Given the announcement of the General Election in June, it seems unlikely that this will be issued before the autumn.
