February 28, 2018

Global uncertainty created by Brexit negotiations and the American election has made it more difficult than ever to predict the future direction of house prices in the UK.

The UK has seen a period of strong house price growth, some experts now believe that property values could stagnate, or even fall, while others point to limited supply in the market and continued low interest rates to suggest that prices could continue to rise fast.

House prices have remained buoyant, despite gloomy predictions in recent years.

The government’s Office of Budgetary Responsibility (OBP) says that house prices rose 7.6% in 2016. In the first quarter of 2014, house prices were growing at over 8%, and there hasn’t been a quarter when they have decreased in value since 2012.

To put this in context, five years ago the average property price for the UK was £116,000 according to Land Registry figures. Now it is £218,000, which represents eight times the average annual salary.

The rise has made it increasingly difficult for first-time buyers to get onto the property ladder, and for so-called ‘second steppers’, those trading up from their first small property to a larger home suitable for a family, to make the next move.


What caused prices to rise?

House price growth has outpaced inflation in other areas for a variety of reasons. One of the most important is the fact that, although the number of households in the UK is increasing, we are not building enough homes to keep pace.

The number of new households each year has exceeded the number of homes built in every year since 2008, and the gap between the two has widened in recent years.

Low interest rates and changes to pension legislation have added to Britain’s army of landlords, with many choosing to buy property as a steady retirement income because income from other sources is hard to find.

To add to this phenomenon, overseas buyers have been snapping up UK homes to rent out for income, partly because of the strong housing market and partly because of the UK’s reputation as a stable place to buy.


What is the current situation?

Recent figures from various expert sources suggest that house price growth is finally beginning to slow down. Rightmove, the online property service, said that ‘UK house prices are growing at their slowest rate for four years.

Rightmove, which measures the amount that sellers ask for their homes, rather than the amount that is finally paid for them, said that the rate of annual house price growth was 2.3% in February, which is the weakest it has been since April 2013.


What could happen next?

Economists have different views on the future direction of house prices, most seem to agree that house price growth will slow.

Howard Archer, chief economist at HIS Markit says that house price gains over 2017 will be no more than 3%, “and could be less”.

Robert Garder, chief economist at Nationwide, forecasts a 2% rise, while the government’s own OBR forecasts that the rate of increase will drop from around 6.5% in 2017 to 4% in 2018.

Mr Archer points to weakening consumer confidence, which means that many people will delay making major spending decisions. However, he points out that there is still a shortage of supply of housing, meaning that prices cannot fall far.

Mr Gardner says that rising inflation, caused partly by Britain’s preparations to leave the EU, would eat into consumer spending power and would push down prices.

“In our view a small rise in house prices of around 2% is more likely than a decline over the course of 2017, since low borrowing costs and the dearth of homes on the market will continue to support prices,” he says.

Interest rates are expected to remain low for some time, which also supports house prices, as customers can afford to pay larger mortgages. Meanwhile the weakness of the pound, which fell in value dramatically against other currencies after the Brexit vote, may further encourage landlords from abroad to invest in the UK, supporting prices.