Housing market forecast rationale

We discuss the factors that will influence the UK housing market over the next five years.

Keys House 128196476
Cherry Reynard
Published: 01 Mar 2019 Updated: 04 Aug 2022

There are several factors that will influence the UK housing market over the next five years. The first is the economic and political situation surrounding Brexit and the second is a paradigm shift in the housing market where demand drivers are weaker and the drags on the market are stronger.

The principal reason for this new paradigm is a shift in the drivers of higher house prices and greater weight to the drags on prices. In short, many of the significant housing market boosts we have seen in the recent past, such as a fast expanding population, low interest rates and the view that housing is a lifetime investment necessity (principally due to historically strong long term house price growth), have each now largely played out.

At the same time, constraints are also likely to play a bigger role. Overall house price affordability, tighter mortgage lending rules, less support from the Bank of Mum & Dad (as parents need to use housing wealth for their retirement) will start to loom larger. The investor landscape is also now less favourable meaning that owner- occupiers and the affordability issue becomes even more significant. So, demand drivers are likely to be weaker over the forecast period – and quite possibly beyond - compared with most of the last 20 years.

With regard to the first factor, and for the purposes of generating base case UK housing market forecasts, we assume that the UK agrees a deal with the EU on Brexit, that it is approved by Parliament and that the UK economy recovers to circa 2% pa GDP growth during 2020-2023.

There are also several other factors that will influence the UK housing market.

Consumer confidence is key

Consumer confidence is a critical driver of the housing market. The uncertainty surrounding Brexit has dented consumer confidence while also casting a shadow over the job and personal financial prospects of millions of people. Such uncertainty is not conducive to big ticket purchases and has therefore impacted the UK housing market.

Other factors such as negligible real wage growth and, more recently, higher interest and mortgage rates are also not supportive of a thriving housing market. A lack of affordability, especially for first-time buyers, is also hampering transactions and house price growth, despite support from Help to Buy and the Bank of Mum and Dad.

Investor influence fading

Government initiatives to dampen the role that investors play in the housing market look to be working. Although only a part of the story, the number of loans to BTL landlords has fallen by 46% between the Referendum and July 2018.

The principal disincentive is the less favourable income tax regime, with higher stamp duty an added financial deterrent. We expect investor appetite to remain muted while house price growth prospects remain both uncertain and relatively weak. This shift is important because it means that owner-occupiers, and therefore fundamental affordability, are even more important than before.

The consequence of all these influences has been a slowdown in UK house price growth and housing transactions since the EU Referendum. New housing supply, which was in the midst of a five-year surge, has also slipped back over the past year.

Base case housing forecasts

Our base case forecasts are for UK house price growth to weaken further during 2019. We expect transactions to slow too, while housing starts will also ease down.

Assuming the Brexit process continues along the current proposed timetable, the economy and consumer confidence will improve during the second half of 2019 and into 2020. This greater certainty will lead to a marginally improved UK housing market.

From 2021 we expect greater certainty to lead to an economic recovery and improved business and consumer confidence. This will lead to a brighter UK housing market with house price growth and the number of transactions increasing – especially in London and south-eastern markets. Housebuilders should also feel more confident, increasing housing starts gradually.

Overall, however, we expect house price growth to be reasonable over the next five years.

Forecast risks

There are a number of risks to our base case forecasts. The main risk is that UK economic weakness is prolonged by a year or two. This would result in lower house price growth and transaction forecasts in the early years of our outlook, pushing the housing market recovery into 2022 or 2023.

The second most likely risk is that the Brexit deal negotiated and approved is not as favourable for the UK as we assume. In this scenario our house price growth and transaction forecasts will be slightly weaker over the forecast period. The other risk is that the UK exits the EU with ‘no deal’. This would result in a far weaker UK economy and housing market over the next five years

By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.


This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.