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UK housing market: expect the unexpected?

House prices across the UK have continued to grow strongly, according to the latest figures from the ONS. The average cost of a home in UK reached £287,000 in October, the highest since records began and a 7.0% increase year-on-year. Unsurprisingly, London continues to remain the most expensive city, with the average cost of a home recorded at £531,000 in October – 51.6% higher than at the pre-recession peak. However, the pace of house price growth was particularly rapid in regions outside the capital such as the East (10.4%) and South East (9.5%).

Indeed, strengthening demand against a backdrop of limited supply remains responsible for fuelling house price increases. Despite this dent to affordability, mortgage activity has continued to increase. According to the Bank of England, the number of mortgages approved for house purchases totalled 69,630 in October, a 17.2% increase year-on-year and a 1.4% increase year-to-date. The value of these loans was £12.2 billion, 25.8% higher than a year ago and a 7.0% increase for the year-to-date. Reflecting the strength in mortgage lending, property transactions in the UK totalled 105,490 in October, a 6.3% increase from a year earlier, according to HMRC.

Unpredictable future

The future of house prices and property transactions growth remains mixed, according to the OBR. The OBR expects house prices to average growth of 5% each year over the next five years in line with forecasts from other organisations such as Savills. However, according to the National Association of Estate Agents and the Association of Residential Letting Agents, house prices in the UK are expected to soar 50% over the next ten years, rising from an average of £280,000 to £419,000 by 2025. This just goes to show how the notion of rising house prices have become a national obsession.

With house prices on the rise, affordability will inevitably become a greater issue as wages rise at a slower pace. Wage growth of 4.4% is forecast for 2015 and 4.5% in 2016 before slowing each year over the rest of the decade, according to the OBR. In addition, with the Fed having increased interest rates for the first time in nearly a decade, this increases pressure, and, in turn expectations for the Bank of England to follow suit.

In terms of property transactions, the OBR has revised down its growth forecast for the next five years. The revisions primarily reflect the additional 3% stamp duty land tax on properties purchased as buy-to-let or as a second home. In order to keep margins intact, landlords are likely to pass on the increased stamp-duty costs to their tenants, which in turn could push rental prices up. As buy-to-let investors bring forward purchases before the stamp duty changes come into effect from April next year, we are likely to see an increase in property transactions in the short-term.

Looking ahead, with demand increasing, thanks to government schemes such as Help to Buy and the Help to Buy ISA, the focus will mostly remain on new-build. However, with rising house prices, affordability issues for second-steppers, and anecdotal evidence of low availability, existing homeowners may turn to rm&i instead of moving. Extensions of existing properties and internal improvements will appear as an attractive option for homeowners and we forecast private housing rm&i output to average growth of 3.2% each year over the next five years.

Overall, the future path of house prices remains unpredictable and to what extent rising interest rates and the new stamp duty on second properties will dictate housing market growth remains unclear.

Figure 1: UK house prices and property transactions

By Amandeep Bahra at 21 Dec 2015, 16:07 PM

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