Spring seems to have come early for the UK housing market. The Royal Institution of Chartered Surveyors’ survey reported a sharp rise in new buyer enquiries and house price expectations in January. New instructions for house sales are rising at the fastest pace in over six years. House price inflation has edged up in the last couple of months.
The recent stirrings follow a period of sluggish housing activity. The rebound in house prices and activity which started in 2013 hit the buffers in 2016, the year of the EU referendum. The Halifax measure of house price inflation dropped from a year-on-year peak of 8.8% in the spring of 2016 to a low of 0.9% last October. House prices in London have grown far slower than the national average in the last three years, a development which has made housing in the capital marginally more affordable relative to incomes.
Yet over a longer period the picture is of house prices far outstripping general inflation and earnings. Since 2000 the Halifax measure of UK house prices almost tripled while earnings have risen by less than 80%.
A recent Bank of England working paper argues that the rise in house prices in this period can be largely attributed to the effect of lower interest rates. A lower discount rate raises the present value of an asset, thus raising house prices. (The same process has done wonders for equity prices.) But the relationship works both ways. The model developed by the author of the Bank paper suggests that a sustained increase of 1% in long-term interest rates could lead to a 20% fall in house prices.
The triple shock of disinflation, credit liberalisation and quantitative easing helped power UK house prices. It is a remarkable combination, but one that seems unlikely to be repeated in the next 20 years.
Of course housing demand has also risen due to the growth of single person households, immigration and greater longevity; the number of English households has increased by 13% since 2000. Given the deterioration in housing affordability and rising concerns about housing shortages it is, perhaps, surprising that the official data show that the number of dwellings in England has increased at a rather faster rate than the number of households.
This is less reassuring than it might seem. There are acute regional housing shortages, evidenced by soaring rents in London. And the quality of the housing stock is hotly debated. UK housing is ageing, prompting LSE academic Paul Preston to declare that houses “are akin to Cuban cars: they are still in use but they are clapped out and polluting”. We will return to the question of housing supply in a future Monday Briefing.
Looking ahead, it seems plausible that the government’s post-Brexit migration policy, coupled with very low unemployment rates in central Europe, will slow the rate of growth of migration. Meanwhile housing supply is picking up from the lows seen in the wake of the financial crisis.
Sentiment in the housing market has perked up. But the tailwinds which drove a vertiginous rise in prices over recent decades are weakening. The scope for substantial reductions in interest rates has diminished. A period of rapid growth in immigration may be drawing to an end. Expanding housing supply seems, once again, to be a political priority. The double-digit house price inflation of the decade before the financial crisis looks increasingly like another world.