Slow but stable(ish) house price growth lies ahead

摘要

UK house price growth is running out of steam. And with household incomes squeezed and the affordability of housing stretched, we think a prolonged period of very modest growth lies ahead. But the prospect of a crash is remote. At 2.6% in Q2 2017, annual house price growth is presently running at a four-year low. This is a step change down from the recent peak of nearly 10% in mid-2014 and average growth of 4% over the current economic expansion. Three developments are likely to lie behind this slowdown. The first is weak growth in households' real income, cutting the ability to save for a deposit or finance a move up the housing ladder. That said, past periods of sluggish income growth have not always been associated with low house price inflation. The second is the consequence of recent tax hikes imposed on buy-to-let investors and second-home owners, which theory suggests should be capitalised in lower property prices. The third and perhaps most important reason is the increasing unaffordability of housing to an ever-widening sub-set of the population. The ratio of house prices to earnings is almost back at its pre-crisis record. And the income of the average mortgage borrower is close to £60,000, more than double the average annual wage. This third factor has implications beyond price growth, suggesting both a permanently lower level of transactions and a further decline in the number of households with mortgages, continuing a trend which began at the beginning of the century. But set against these headwinds is the cushion provided by record lows for both mortgage rates and mortgage affordability. Overall, house prices are caught between a lack of traditional drivers of accelerating growth, but equally an absence of forces which have typically caused prices to fall. Hence, our expectation of a period of sluggish, but relatively stable, growth.