2017 – A Year of Wildcards?

20.12.16

Slowly but surely through 2016, the headline rate of house price growth has slowed in the UK. What had been driving it before — the rapid pace of price growth in London — is ebbing away as affordability issues for first-time buyers and tax hikes on expensive and investment property have subdued demand in the city.

According to the latest data from Land Registry, the annual rate of growth for the average UK house price slowed from 7.7% in January to 6.9% in October. In London, this is more pronounced: a slowdown from 13.5% in January to 7.7% in October. So what does next year hold for house prices?

Underpinning house prices is a protracted supply shortage in some areas of the country, particularly London and the south-east of England. We are building fewer than 150,000 new units a year in England and Wales. The government is targeting a million new homes by 2020, so that number has to drastically increase.

More government money is being funnelled to housebuilding, planning laws are being relaxed, and public land is being freed up for development. Will it be enough? Even if it is, the effects will not be felt in 2017, so the supply problem will persist, offering substantial support to house prices during the year.

In London, prime areas are still licking their wounds from tax hikes. Prices are falling in the likes of Kensington and Chelsea, though these drops are partly offset by rapid price growth in outer areas, such as Barking & Dagenham, where property is cheaper and homebuyers and investors are flocking there in search of value. Affordability issues for first-time buyers in the city will continue to bite, however.

This slowdown in the capital will likely be experienced across the rest of the country with price growth down notably on 2016 levels. Industry forecast is 1% house price growth in the UK during 2017, down from 5% in 2016.

London's slowdown is also driving more buyers out to neighbouring regions, where they can find cheaper property, or get more for their money if they currently own a home in the city and want to cash in on recent gains. And that is sending prices in these areas higher.

There are a number of political wildcards on the horizon too. It's not clear how they will impact the housing market, but the risk is there. Brexit is the biggest challenge. The government is set to begin formally exiting the EU by March 2017. The negotiation process will be complex, difficult, and fraught with disagreement, creating a cloud of uncertainty over the economy.

This could deter investors and weaken demand from ordinary homebuyers if the economy takes a turn for the worse. On the other hand, London in particular may see a boom in foreign investment because of sterling's Brexit-related weakness Nobody really knows what will happen. But turbulence is almost certain.

The five year outlook for the UK is almost wholly dependent on the terms of the exit from the EU and the agreements we manage to put in place. The UK is entering uncharted territory... Although turbulence is likely, there have already been some encouraging signs that the Brexit economic effect will be smaller than predicted.

Next year will be when President-elect Trump takes office in the US. His political and economic impact on the world is also unclear. But he has promised big changes in how the White House operates, and that could mean significant disruption. Time will tell. Moreover, the French presidential election towards the end of the year could see the election of Marne le Pen of the far-right Front National, something that could all but kill the EU.

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