House price forecasting is never easy, but in the final, frenzied weeks before Britain's expected departure from the EU, the task is harder than ever.
Currently, so much is up in the air with regard to the state of negotiations that - important though it may be - Brexit isn't a subject on which property market forecasters can yet say anything very meaningful. Post-March, once our position is clearer, we can begin to take a more informed view of the likely economic impacts in terms of inward investment, job prospects, inflationary pressures and the fiscal measures that the Bank of England might take to control them. But for now, we can only spectate as discussions continue. Until they are resolved, Brexit will remain a very visible elephant in the room.
That said, there are many other issues that will be of interest to investors in the year ahead. In this housing price forecast post, we'll do our best to unpick them from the broader, Brexit-clouded picture.
The housing market was subdued in 2018, with transaction volumes down across the board. London, as ever, tended to skew the figures; its overpriced, low-yielding properties failed to appeal last year and sales were correspondingly depressed.
The national market was more mixed. Unattractive returns in parts of the South East sent many investors northward in search of better deals, so cities such as Birmingham, Liverpool and Manchester remained buoyant.
More generally, however, concerns over affordability and economic uncertainty saw average sales times lengthening during 2018, and there are few signs that this will change this year. As the BBC observed in January, "The expectation among commentators is that there will be more of the same in 2019. The market will keep moving, but slowly." RICS takes a similar view but expects total sales in 2019 to fall by around 5% compared to last year.
A slow market will always tend to constrain price growth, and this would certainly seem to have been true of 2018. In a climate of uncertainty, many buyers played 'wait and see', so there was little upward pressure on prices. According to the property site Zoopla, the average British house gained just 1.02% in value during 2018, equivalent to an increase of £2,860.
In interviews with the BBC and UK newspapers, commentators made the following housing price forecasts for the average change in UK house prices over the course of 2019.
- Hometrack: +3%
- Savills: approx +3%*
- Halifax: 2% to 4%
- Capital Economics: +1%
- Rightmove: no change
- RICS: no change
* (based on a 5 year housing price forecast of 14.8% by 2023.)
It's important to emphasise that these are UK averages, which say little or nothing about investment prospects in specific locations. For example, while Capital Economics' Andrew Burrell expects average growth of 1% nationwide, he also suggested that house prices could fall by as much as 5% in London. Elsewhere, northern university cities and those benefiting from major economic development programmes could well see average values rise by 5% or more.
The same was true last year. Zoopla reports that while the average property gained little over 1% across the country as a whole, at least part of this was due to a faltering London market. Look at the figures for Scotland, for example, and the figure was a much healthier 6.43%.
Historically, there has always tended to be a strong link between house prices and average wage growth. When people are in work and earning decent incomes, they are generally more willing to invest in a new home. Conversely, when money is tight and job losses are threatening, people often batten down the hatches and make the best of what they have.
Currently, many parts of Britain are witnessing record levels of employment, and average wage rises have been creeping slowly upwards. That augurs well for capital values in 2019, although the general performance of the economy will have an enormous influence on people's living conditions in the months ahead. That, of course, is the big unknown, and here is where forecasters run headlong into the question of Brexit.
If things go badly, then employment and average wages could fall while import prices (and therefore inflation) would rise. Those factors would greatly erode people's sense of wellbeing and the potential for capital growth in 2019. But of course this can only be speculation. If negotiations go well and Britain witnesses the prosperity predicted by leading Brexiteers, then quite the reverse could be true.
Leaving aside the B-word, many economists expect that average salaries will continue slowly upwards, but not at a rate that has a big impact on the affordability of housing. If wages keep pace with inflation, then the net effect on affordability is minimal. Moreover, if the Bank of England continues to slowly ramp up the base rate of lending, then mortgages may also become marginally more expensive.
Russell Galley of the Halifax summed up the situation in an article published by the Daily Mail at the end of last year. He said: "Aside from the obvious political and economic uncertainty, the biggest issue for the housing market in 2019 will be the degree to which mortgage payment affordability changes... Average pay growth is likely to gather pace but, with a further interest rate increase also predicted, house prices are unlikely to be pushed significantly in either direction."
The North South Divide
When it comes to affordability, location is everything. In cities like London, Oxford and Cambridge, average values are 10 times average earnings. Across the UK as a whole, prices are around 7 times average earnings. The gulf is now at its widest since the time of the global financial crisis. However, the ratio is considerably more manageable in parts of the country that saw slower house price growth in the years after the financial crisis. Once again, that tends to favour the Midlands and the North.
If we discount London and the South East from UK averages, then the picture for 2018 was one of steady house price growth, and (Brexit aside) there are few reasons to expect the situation to change this year.
In December, Zoopla's Richard Donnell said: "affordability levels remain attractive in many areas outside of southern England, and on the back of rising employment and low mortgage rates, we see values outperforming the rest of the country; a trend we expect to continue into 2019."
This is a view that many commentators share. Speaking this month to the FT, Andrew Mason of Lloyds Bank noted that "over the past five years, more than half of northern cities have made the UK top 10 in house price growth."
We'll look at the subject of yields in a future post but there is no doubt that more affordable properties in areas such as the Midlands, the north of England and Scotland are tending to produce much more attractive returns than other parts of Britain. That being so, investor demand is likely to remain strong here. Furthermore, in the bigger cities, students are maintaining robust demand for rental property, and with home-building rates still very low, that underlying imbalance between supply and demand still favours continuing price rises.
Other positive factors include the fact that employment rates are still very strong and mortgage rates will remain low; even if the Bank of England chooses to raise them, it has said that it will only do so in small, gradual increments so as not to rock the economic boat.
In our house price forecast, we've addressed some of the most important factors that could influence house prices over the coming year. Under normal circumstances, 2019 would be shaping up to look very similar to other recent years: a slow market with some challenges but built on firm economic foundations. Those foundations include very low mortgage costs, a pronounced under-supply and extraordinarily high levels of demand. Typically, that should all amount to 'business as usual' for property investors; an expectation of respectable gains and dependable rental demand.
However, Brexit is a factor that cannot be overlooked. Here, now, just a few short weeks before the UK's departure form the EU, it's impossible to predict what the outcome might be, nor what the implications will be for the property market. All that can be said with any confidence is that the eventual decision - whatever it might be - will lay a new foundation; a basis on which investors can begin to plan again.
If you're considering a property investment this year, then please talk to one of our advisors. The UK picture might be unpredictable at present, but there are some excellent investment opportunities available in locations that boast exceptional returns and economic resilience. Call us today on 01244 343 355.