House price inflation slowing, but UK market remains robust
Harry Nourse, 31 March 2017
We believe that the rate of increase in UK house prices may continue to slow towards 2%, with any particular weakness likely to be experienced in Central London, which has seen the highest house price inflation in recent years. Elsewhere, we expect moderate growth as supply remains restricted and demand elevated, with buyer interest supported by low unemployment levels and robust consumer confidence.
GDP growth has been resilient since the Brexit referendum, equivalent to a 2% annualised rate. Recent composite Purchasing Managers’ Index readings in the mid-50s are consistent with this level of growth in the economy. Unemployment remains relatively subdued at 4.8%, although the redundancy rate ticked up slightly in the last couple of months. Consumer confidence remains significantly higher than the 2011-2014 post financial crisis “recovery period.”
On the funding side, 5 year swap rates have risen 30bps from last Autumn’s trough levels and partly reflect a tightening in global financial conditions following the US election result. However, on a historical basis, rates of c.1% remain extremely low. This increase suggests we are unlikely to repeat a similar fall in mortgage rates as experienced in 2016, due to a decline in funding rates.
New buyer enquiries are still rising (+5%) per RICS, although new sales instructions are falling (-11%) suggesting a continued imbalance between supply and demand. However, transaction volumes are essentially flat year-on-year, per HMRC. The amount of housing stock available for sale remains at historically low levels.
Demand growth has been strongest recently in the regions, led by the South West, with London performance remaining more subdued. Buyer loan to incomes have now reached a median level of 4x in London, which compares to the prior peak of 3.4x seen during 2007. For the UK as a whole, buyer leverage is 3.4x vs the 2007 levels of 3.1x. We suspect that there is little appetite among lenders to see further reductions in lending standards.
The trend of slowing house price inflation is continuing. Nationwide reported 4.5% increase in prices in February (vs 4.3% in January) and Halifax indicated 5.1% (vs 5.7% in Jan). Across the regions, growth has been strongest in the East and South East., with Scotland the weakest.
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