- Estate agents Savills forecast on Thursday that national house price growth will slow by half, growing by 14.2%.
- Brexit-related uncertainty and rising interest rates are set to dampen the market, but undersupply means it will continue to grow.
LONDON — After decades of runaway growth, the UK housing market is slowing down.
Estate agents Savills forecast on Thursday that national house price growth will slow by half, growing by 14.2% between 2018 and 2022, a drop-off from the 28% price growth seen in the previous five years.
So what’s driving the slowdown? Business Insider spoke to several analysts and forecasters who explained how Brexit uncertainty, mortgage constraints, and interest rate hikes are set to dampen the market, although a chronic shortage of supply means growth will remain positive.
Here are Savills’ forecasts for UK house price growth:
Savills / Business Insider
The forecasts show that UK house price growth is expected to slow next year as Brexit-related uncertainty weighs on buyer sentiment. A return to growth is expected in 2019 to 2020, but it will slow again in 2021 as predicted interest rate hikes make it harder and more expensive to obtain a mortgage.
Uncertainty over what Brexit will increasingly act as a drag on house prices
“Uncertainty over what Brexit means for the UK economy and how it will impact household finances will increasingly act as a drag on house prices,” said Lucian Cook, head of residential research at Savills.
“There is capacity for growth once we have greater clarity, but this will be constrained by rate rises and the corresponding ability to get mortgage debt, particularly in London and other high-value locations.
“Mortgage regulation, introduced in 2014, is likely to show its hand as interest rates rise. But by restricting the amount people can borrow, it will take the heat out of the market and so reduce risk now and in the future.”
Interest rate hikes
On Thursday, the Bank of England hiked the base interest rate from 0.25% to 0.5%, meaning variable mortgages will be more expensive, although not dramatically so: David Hollingworth of L&C Mortgages says an increase of 0.25% on a £150,000 standard variable mortgage at 4.5% over 25 years, would see payments rise by around £20 per month.
Richard Snook, senior economist at PwC, said that while “headwinds are evident” in the UK housing market, the rising interest rates shouldn’t have a big impact for home-buyers.
“UK house price growth was not affected by the Brexit vote as quickly as expected, but headwinds are evident, particularly in London where the market is more reliant on international business,” he said.
“A quarter-point rise to 0.5% takes the Bank rate back to where it was from 2009 to 2016, so this shouldn’t have significant adverse impact on mortgage borrowers and could be the start of good news for savers.”
“However, pressures on household incomes means we expect UK house price inflation to remain around 4% to 5% on average for 2017.”
Here is PwC’s own near-term UK house price forecast:
PwC analysis based on ONS house price index
A lack of supply
Fionnuala Earley, Countrywide’s chief economist, told Business Insider that growth will continue to be supported by a lack of supply in the market.
“In terms of house prices, the lack of supply in the face of growing household numbers over a number of years will support the level of prices, despite a slowdown in the pace of growth,” she said.
The lack of supply in the face of growing household numbers will support the level of prices
“That is natural in a market cycle and reflects the deterioration in affordability and weakening expectations about the pace of future house price growth in the short term.
PWC’s own short-term forecasts suggest that house price growth will hit 2% in 2018, and climb to 3% in 2019.
“I’d say that while the economic conditions we face aren’t ideal, in fact the UK economy is relatively robust with high levels of employment,” Earley said.
“Of course there is uncertainty about the impact of Brexit on UK jobs — which may have an effect on households confidence, but people still need to move house for a host of normal human reasons and they will continue to do so.”