“A house divided against itself cannot stand,” said Abraham Lincoln. This famous quote from the era of American Civil War can be applied to the current crisis in the UK housing market as several influences threaten twenty years of growth.
Beginning in the mid-1990s, housing prices have steadily climbed. For example, the average price of a house in London in 1994 was L88,000. By 2014, that price had grown to L242,000. Even the financial crisis in 2008 failed to stop this rise. Yet, since 2016, the housing market has shown signs of slowing down significantly. The Office of National Statistics figured housing prices in June 2016 had increased 9.3% from previous year, but by September 2016, that growth had slipped to 6.9%. At that time, other market experts predicted that 2017 would see only 3% increase in housing prices. In the first quarter of 2017, more grim predictions of a slowing housing industry followed. 30 economists forecasted that this was the first year of a long pause in house prices.
While individual house prices are a major focus of the housing industry in the UK, there are other areas of the housing industry that also merit attention. First, new construction continues is a concern. Though government studies have recommended that 300,000 new homes need to be constructed annually in the UK, the official government target is 200,000. Even this deficient number has failed to be met recently, as there were only 190,000 newly constructed homes last year. Some experts fear that 2017 numbers will be much less, perhaps even as low as 134,000 new starts. With immigration continuing strongly in the UK, this disparity may exaggerate the troubles in the housing industry.
Secondly, the housing sector of buy-to-let has suffered some recently. Due to the stamp duty changes that became effective in April 2016, investing in properties for rental income have fallen sharply. In March 2016, there were 29,300 mortgages obtained for the buy-to-let market, a record number, as investors hurried to make purchases before the new rules began. By October 2016 that had fallen to 6200. While some market watchers believe foreign investors will still see the buy-to-let sector as attractive, the fall of the sterling pound value after Brexit has made UK properties worth less in the foreign currency. This potentially could affect the properties available in the buy-to-let market.
Third, underlying economic factors may negatively impact the housing market. The financial uncertainty in the UK since the surprising passage of the Brexit referendum may discourage house purchases. Since Brexit, consumer spending, employment rates, and pay growth have all slowed. This combination has caused some consumers to reconsider purchasing a home.
Finally, the weakening housing trends have resisted government actions. The Bank of England has cut interest rates to .25% with the commitment to low rates for the next two years as the UK adjusts to the withdrawal from the European Union. This has still not prevented the slowdown in housing.
Though the slowdown in the UK housing market has been a difficult time, the words of American billionaire Warren Buffet during the recent U.S. Great Recession are worth remembering: “We’re still in a recession. We’re not gonna be out of it for a while, but we will get out.”