UK house prices: The property market is mired in uncertainty – brace for higher prices and polarised demand

 
Graeme Leach
History suggests that house prices only fall when there is a wider economic recession (Source: Getty)
It is time for a big think about UK house prices. Does anybody know which way they will turn? Whether we’re looking at the short term or the long term, a tremendous amount of uncertainty abounds.
Looking at the short-term outlook, latest figures from the Halifax show prices rising by 9 per cent year-on-year, while Nationwide estimates the growth at just 3.2 per cent. So there’s no consensus even on where we are currently. Housing market analysts struggle with now-casting, let alone forecasting.
Most of the leading forecasters thought house price growth would be in the 3-5 per cent range this year, but they’re now busy doubling their forecasts to around 6-7 per cent plus growth.
Looking longer term, out towards 2020, my quick survey of leading forecasters identified cumulative rises of between 18 per cent and 35 per cent. That’s a big range in views, and is mainly down to three layers of uncertainty.
The first layer is the macroeconomic outlook and the debate around normalisation. Just how normal will normalisation be?
If broad money growth remains weak, then normalisation will be a very long and shallow incline that shouldn’t be too adverse for house prices. But if the reverse is true and broad money accelerates significantly, the interest rate and house price consequences could be sharp, with an upward spike followed by a fall in both.
The second layer of uncertainty stems from the amount of “chatter” in the market at present. An awful lot is going on simultaneously.
Housing looks expensive on one affordability measure (the ratio of house prices to earnings), and much cheaper on another (mortgage debt servicing costs).
Earnings, employment growth, house price ripple effects emanating from the South East, the removal of political uncertainty after the General Election, and first-time buyer catch-up effects are all driving the market forwards. But it’s also being held back by bank deleveraging, macro-prudential rules, the size of deposits required and limits to borrowing from the bank of mum and dad.
The final layer of uncertainty revolves around the long-term drivers of UK housing market performance. Will we see the continued rise of generation rent? Or will there be a late surge or tsunami in owner occupation?
Generations X and Y seem to do everything later – marriage, cohabitation, children, pension saving etc. Surveys suggest that around 60 per cent of those now in rented accommodation wish to buy. But will they be able to?
Do measures of long-term affordability return to their average? If they do, the price to earnings ratio suggests that house prices could easily fall by 20 per cent or more. Are all these demand-side factors rendered mute by the inelastic supply of properties in the UK?
Economic history suggests that house prices only fall when there is a wider economic recession. But outside of recessions, the steep supply curve ensures upward changes in demand quickly feed through into higher prices.
The uncertainty intensifies the further you look ahead. Will the baby boomer generation engage in massive downsizing, vacating under occupied properties now too big for them, to trade down to smaller properties and free up equity to offset pension under-provision?
Will generations X and Y be able to trade up? Or will they be constrained by insufficient housing equity, student debt, deposit levels and weaker aspirations towards home ownership?
The net result could be a very polarised housing market, with strong demand for smaller properties and an excess supply of larger homes.
Population and household formation is critical. But, and particularly given the EU referendum in 2017, the uncertainty around future net migration is probably greatest of all.

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