In hindsight, it’s not a surprise; after all, the housing market is a national obsession, and we have a plethora of house price indicators to boot – probably more than anywhere else in Europe, where there appears less desperation to get on the 'ladder' and many are happy to rent on a long-term basis.
And it’s a market cycle worth keeping an eye on as it is closely linked to consumption, investment and therefore overall UK economic growth.
But this obsession, especially with owning our own home, seems to be lessening. In the past 10 years, the number of homes that are owner occupied has fallen. Meanwhile the surge in privately rented dwellings has absorbed all of the new increase in the number of homes, as shown in the chart below.
Why does it matter? Well the privately rented segment is effectively the ‘buy to let’ market, which has been a key driver of the housing market, helped by low interest rates and an advantageous tax regime. For many people, owning a property has become part of the retirement plan, with fewer employers offering final salary pension schemes.
However, a number of headwinds have buffeted the sector recently such as the 3% surcharge on stamp duty and the phasing out of higher-rate tax relief on mortgage interest repayments in the coming years. We believe that the full impact is yet to come through, but already housing transactions are subdued. Transactions tend to lead housing starts, so the supply of new housing should gradually adjust to the new reality.
But in the short term, a further slowdown in house prices seems likely. Particularly when the headwinds faced from a likely slowdown in immigration triggered by Brexit (the number of coming to the UK looking for work has fallen in since the referendum, as shown in the next chart), and stretched affordability are taken into account.
But could a crash – say 15-20% drop in prices – be imminent? I don’t think so, but it is fair to say that others in the team are more bearish than me. In my view a small correction, say 5% or so is more likely, and even that would only reverse the gains of the past year. While it is true that – given our obsession – a self-fulfilling downward spiral is a risk, we believe that low interest rates, loose credit conditions and record low unemployment should provide a cushion. Should interest rates rise substantially over the coming years – not our base case – a sharper drop in house prices becomes more likely.