The next five years will be the start of a new housing paradigm. House price growth will be more moderate than over the past 20 years and consumers and industry participants will have to adapt to a very different rationale that underpins housing decisions.
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 housing market boosts we have seen in the recent past, such as an expanding population, low interest rates, dual income growth and the belief in housing as a lifetime investment, 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.
These factors will converge over the next two years at precisely the time when the UK economy is in its weakest state since 2012.
High house price growth over the past 20 years has also been supported by an undersupply of housing relative to the rise in population. While a significant improvement in housing delivery volumes is still needed to redress the balance, we believe that the undersupply-generated price pressure will not be as strong in future.
There are two reasons for this. The first is that Brexit is likely to mean a slower rate of population growth relative to the past two decades and the second is a permanent step up in the volume of housing which will be delivered.
The upshot is that although supply will continue to fall short of need, we believe that the fillip the housing shortage has provided to house prices will be diminished over the medium-term.
One truth we can cling to is the finite period of the Article 50 negotiation period. There is clearly a wide degree of variation on the type of Brexit deal still to be struck, but from March 2019 (and likely a full 6 months sooner), we will have a better understanding of our future relationship with Europe.
So, the rest of 2018 and 2019 will provide relatively weak consumer and household confidence to support the UK housing market led by a slower economy courtesy of Brexit. We expect UK house price growth to be just 1% in 2018 and 2.0% in 2019, while transaction levels will remain just below 1.2m pa. The lettings market will be a little more robust during this time, but rental growth is expected to remain muted at circa 2% pa.
It will also be notable during this period that house price growth will be stronger outside of the less affordable London and South East regions. The much stronger rates of price growth that London and region has experienced for some time will be reversed in favour of many regions outside of the Capital.
However, from 2020 the economic and trading landscape will be operating under some form of transition arrangement. This will provide relative clarity on the UK’s trading position and facilitate the backdrop for a stronger economy, accompanied by growing consumer confidence.
As such, JLL believes that house price growth will improve steadily during the 2020-2022 period, reaching 3½% pa in the UK, with transaction volumes also rising slightly to 1.30m pa. This is in line with long-run averages.
The rental market will continue to expand, both because of continued unaffordability in the sales market but also supported by the growing trend of renting by choice. We expect rents to rise steadily by around 2½% pa during the 2020-2022 period.
Improved consumer confidence and housing market dynamics will encourage housebuilders to raise output levels. They will - modestly - but by this stage the industry revolution towards a wider range of delivery organisations and greater adoption of digital construction techniques will make this easier and quicker to achieve. We therefore anticipate housing starts in England to increase towards 175,000 homes a year by 2022.
Not quite the 250,000 homes per year that Government wants or has committed to, but these levels will be a laudable achievement given the range of headwinds that the housing market will have contended with and brushed aside.
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.