Between May and November each year, some of the UK’s most prominent economists and industry professionals publish their property market forecasts for the next year.
It’s always something of a ‘finger in the air’ exercise because of the extent to which the market can be affected by consumer confidence. Domestic economic uncertainty and global events can have a huge impact on prices, so the ongoing Brexit mess has made forecasting what lies ahead for 2018 particularly hard.
So what are the experts saying? Well, they’re all predicting growth, but it ranges from 1% to 4.1%. Savills has the most cautious outlook and, given that it’s the most recently published, perhaps it’s that one we should pay most attention to.
Lawrence Bowles, one of Savills’ Associates, who specialises in residential investment, development and infrastructure, says: “With the UK’s future relationship with the EU up in the air, we’ve seen the UK’s credit rating downgraded, the pound weakened, and the economy subdued. Inflation has cut into people’s earnings, with the ONS reporting that incomes fell by 0.4% last year in real terms. Against this economic backdrop, there are no strong drivers for house price growth over inflation in 2018.”
Looking further ahead, they expect interest rate rises to result in a slowing of growth, predicting house price rises of just 14% over the next five years, that’s half what we’ve seen over the last five.
The latest Bank of England Inflation Report, published on 2nd November, echos Savills, stating: ‘The outlook for the housing market remains fairly subdued … In the near term, price inflation and activity in the housing market are projected to remain well below past averages, broadly consistent with the outlook for income and consumption’.
Forecasts for the capital vary even more widely than those for the UK as a whole. Strutt & Parker expect prices to remain flat through 2018, believing that most of the fallout from Brexit and the stamp duty increases has now been experienced by the prime market and that the outlook for the UK ‘remains reasonable’. Their best-case scenario for the prime market is no growth; worst-case, -5%.
Knight Frank believe prices in London will rise by 2%. Countrywide are being more optimistic, predicting an increase of 2.5% in Greater London, with the prime Central London market increasing by 4%. This is chiefly because they believe that after two consecutive years of falls in 2015 and 2016, a recovery is overdue.
PWC expect an even stronger performance by the capital, predicting a rise of 3.8% for Greater London in 2018 alone and 3.9% on average each year between 2018 and 2020, mainly driven by good growth in the commuter belt and more affordable boroughs, offsetting the weaker performance of the prime market.
Standing apart from the rest, Savills is forecasting that London prices will fall by 2% because they believe that mortgage regulation, affordability and increased stamp duty costs have simply limited the number of people who are able to buy in the capital. According to their research, only 28 of its 600 wards or neighbourhoods have an average house price of less than £300,000 and, with mortgage regulation having the intended effect of preventing borrowers from taking on excessive debt, the market has been forced to slow. They predict that capital growth in London will feel the drag of interest rate rises and the continued stress testing of buyers’ affordability for a number of years yet.
While there’s likely to be a slowdown in the supply of new rental properties coming to the market (as a result of the increased financial and mortgage regulation burden on landlords), wages are still rising at a slower rate than inflation, so landlords might struggle to increase rents during 2018. That could result in a fairly stagnant lettings market for most of the UK throughout much of the year.
That being said – and it’s always sensible to prepare for the worst-case scenario – we can take encouragement from some of the key published forecasts. Although some were made much earlier in the year, the broad expectation seems to be that rents will rise across the UK by at least 2%.
These modest forecasts, combined with the second phase of the withdrawal of higher-rate mortgage interest relief and an expected rise in mortgage rates to above 3% by 2019 (Capital Economics) means you’ll need to keep an eye on your profits in 2018, especially if your local market is unable to support an increase in rents.