UK housing market: Hit by policy changes, high prices and uncertainty – HSBC

UK’s housing demand and price growth have cooled sharply, although the pace of housebuilding has improved and Chris Hare, Economist at HSBC, expects house price inflation to remain soft, with prices rising just 1% to 3% this year and next.

Key Quotes

“Housing demand and house price inflation have slowed

It is becoming increasingly clear that the UK housing market is slowing. Evidence from the RICS survey, alongside data on mortgage approvals and transactions, point to a weakening in demand. Annual house price inflation has softened to around 3%. 

Housebuilding has improved though, having grown by 13% last year. But given the recent weakening in demand, we wonder how long the improvement will last.”

“Policy changes, high prices and economic headwinds are all weighing

• Policy has become much less supportive of demand. In particular, the growth boost from help-to-buy has faded and the buy-to-let market has been squeezed. 
• High prices are excluding many aspiring homeowners from the market – some correction might be warranted. But for existing homeowners, service costs are low, so a very disorderly correction is unlikely.   
• Economic headwinds, such as Brexit uncertainty and the inflation squeeze on household incomes, will continue to weigh on the housing market.”

“London has been hit particularly hard

Policy changes, such as the stamp duty rises for high value properties had an outsized effect in the capital. London (un)affordability metrics are much more stretched, so a larger correction might be warranted. And Brexit uncertainty might be having a larger impact, given the role of foreign investment in London property.”

“We expect low house price inflation, but anaemic supply will prevent deflation

We expect headwinds to persist. And we anticipate house price inflation of around 1-3% this year and next. But we think a protracted period of price deflation is unlikely – despite the recent pickup in housebuilding, supply growth is still running below population growth.”

“Broader economic damage is likely to be limited

In fact the recent improvement in housebuilding is good for GDP in the near term. And even though we expect house price inflation to remain soft, we think that the causal link between (softer) house prices and consumer spending is weak.”