Taking off again in 2019

For the immediate future, the low number of transactions will be holding house price inflation down, creating the expectation that house price growth will remain subdued at 4.1% into 2018 before taking off again in 2019.

The factors currently taking the steam out of the market are primarily due to government regulation, which includes the rise in stamp duty on second homes and the changes in buy-to-let mortgage tax relief.

Real income growth is being eroded by higher inflation, as the effects of the vote to leave the European Union are now being felt by households. The biggest downside risk to the UK housing market is a slowdown in consumer spending and a potential blow to consumer confidence.

Lower interest rates

Activity in the mortgage market has been sustained by the accommodative policy stance of the Bank of England which lowered interest rates by 25 basis points in August last year, resulting in lower borrowing costs.

UK house prices will growing by just 4.4% in 2017, which is the slowest rate since 2013, according to new forecasts by leading economics consultancy Cebr – the Centre for Economics and Business Research. Being part of the consultancy’s Housing Prospects publication, this forecast, sees growth at below 5% for the next two years, after which activity in the housing market is expected to pick up again.

A leading indicator for property transactions, mortgage approval numbers, have recovered from their mid-2016 low and remain on a stable level of close to, but just under 70,000 per month. Compared to the historical average, while this is a low figure, it is near the post-crisis high of 74,000 seen in early 2014.

Foreign demand
With the continuing shortage of suitable housing exerting pressure on property prices – more than 40% of local planning authorities do not know how to meet local housing demand over the next ten years according to the government’s housing white paper. Due to the low value of sterling, those at the higher end of the market, who are looking to sell can hope to benefit from a pick-up in foreign demand.  

Reduction in private buy-to-let landlords

Kay Daniel Neufeld, Economist at the Centre for Economics and Business Research, commented:
“Additionally, the government’s changes to the buy-to-let sector are about to swing into high gear as private BTL investors will no longer be able to fully deduct mortgage interest payments from their tax bill. Starting next month, the government mandates that only 75% of taxes on mortgage interest payments can be deducted at the full rate of 40% while the remaining 25% will be deducted at a lower rate of 20%. Over the coming years, the tax system further reduces the share of pre-tax profits that can be deducted at the higher rate until in 2020 all pre-tax profits can only be deducted at a rate of 20%, essentially shifting the tax base from profits to rental income. This means that for the higher rate paying landlord the applicable tax deduction shrinks by 50% resulting in substantially lower net profits. Cebr expects this shift in the tax regime to significantly reduce the number of private buy-to-let landlords in the market.”

Leaving the European Union

Impacting on consumers’ disposable incomes will be a combination of rising inflation and stagnating wage growth, which will lead to a halt in real income growth. This downside will put a slight dampener on housing demand in 2017 and 2018. The property market is still reeling from additional taxes, which the previous government implemented at a time when they were not expecting that the UK would find itself preparing to leave the European Union.