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What does the future hold for property? A look at the economic position of the UK property market

9th October 2014

Following the joint seminar between haysmacintyre and World First Foreign Exchange on the economic outlook for the UK property market, Jeremy Cook, Chief Economist and Head of Currency Strategy for World First, sets out his thoughts on the current and future issues for property.

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The state of the UK economy is strong as we enter the last quarter of 2014. The outlook for the UK housing market is slightly more finely balanced. Of course, I’m unable to sit here and tell you that everything is strong within the UK economy. The divergence between real wage increases and UK asking prices is in sharp contrast for any of us who read the property section of the weekend papers.

GDP in the UK is growing at around the 3.0% level, close to the highest level within the G10. Inflation, as within most developed nations, is seemingly under control at 1.6%, kept low by a strong pound beating down on import costs. Unemployment within the UK has come dramatically lower in the past 18 months or so. Had you told me that the UK economy would be running an unemployment rate of close on 6% by the beginning of the final quarter of 2014, I’d have thought you were mad. 

Challenges to the UK economy obviously still exist. The productivity puzzle is something that’s baffling economists to this day. Even with the unemployment rate close to what some economists call the natural rate of unemployment, wages remain in the doldrums.

Wages remain key to the Bank of England’s monetary policy outlook. Real wages represent the silver bullet to killing off fears over the recovery. Real wage increases come from optimistic employers happy with business conditions, they allow consumers to re-balance spending figures from credit uptake and promote growth in generalised output with a central bank more comfortable to normalise monetary policy. I remain very much happy with our near-term thoughts of February as being the meeting that will see a rate rise. 

Last month, the Nationwide Building Society - the UK’s largest building society and one of the largest mortgage lenders - saw house prices fall for the first time in 17 months. A 0.2% fall in prices represents around a £1,000 decline in the value of the average £189,306 property. This is not the end of the world but suggests that some of the madness that was seen in housing has started to recede.

Falls in prices are natural as demand slows. Simple supply and demand dictates that price levels dictate the level of supply and demand. As price increases, demand falls off until nobody will pay that amount. Prices have to dip to pick up demand. Have UK house prices already reached their peak therefore?

House prices in the UK have risen around 3% above the levels seen at the beginning of 2008. Prices within the 20 largest metropolitan areas in the United States according to the Case-Shiller index are still around 6% lower over the same time period. London house prices are over 30% higher on average. The affordability of housing is therefore a direct issue for buyers and investors alike.

Over the weekend, the Centre for Economic and Business Research (CEBR) became the first real policy shop to publish its expectations of the property market into 2015. The CEBR has said that it expects prices to fall by 0.8% through 2015 following a near 8% expansion in 2014. The reasons why are more demand side than supply side, of course.

Tougher mortgage eligibility criteria and high deposit requirements have been part of the lending landscape for six months or so. Once the loan is obtained, however, base rate concerns become obvious. Despite every Bank of England official out there saying that rates rises will only be “limited and gradual”, fears that the hiking cycle will run higher and faster than markets currently expect – base rates at around 2.5% in two years’ time – have got buyers doubting their commitment levels to that pad in the suburbs.

Upwards pressure on UK property prices from foreign investors will continue especially if sterling falls that make UK property cheaper in currency terms continue. Unfortunately, UK property may be looking a little less like a haven asset ahead of the election in 2015 and following the continual governance issues that the all-to-close Scottish referendum brought up. Tax issues, such as a possible Mansion Tax - although ill thought out at the moment - remains a definite possibility in the long term, I believe.

The outlook for the UK housing sector is definitely a mixed one. Supply issues remain despite the cranes I can see from my office window and as long as supply remains choked, then prices will persist on an upward trend. Debts and the affordability thereof are a focus that the Bank of England will become more vocal on in coming years and macro-prudential measures to control house price inflation cannot be ruled out.

Jeremy Cook, Chief Economist and Head of Currency Strategy at World First.
 
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