04 November 2016

Blog: UK Housing; from demand to supply

by Scott Fulton | 4 November 2016

As if to reinforce the “Rumsfeldian” nature of post-Brexit economic debate (“unknown unknowns”), the Bank of England’s latest Monetary Policy Committee (MPC) report has pointed to a sharp rise in UK inflation but an increased level of economic activity in 2017. It would appear that the Bank now believes that the real impact of Brexit will be 2018, where it has downgraded its growth forecast. This is consistent with the emerging timetable for actual Brexit, notwithstanding the High Court’s ruling that Parliament will, indeed, have its say on any Article 50 trigger.

One of the key barometers of UK economic health, or at least consumer confidence, is the state of the housing market. Nationwide’s House Price Index for October 2016 showed no movement on September but this still reflected a 4.6% rate of annual inflation, consistent with the levels of April and May. The Halifax Index is due on 7th November and this is expected to show a similar rate of annual inflation. Typically, the Halifax has been more positive on inflation than the Nationwide, reporting a rate c. 500bps higher over the last 9 months. However, this “premium” has been reducing in recent months and there is a chance that, for the first time, this year, the two will agree. Savills also appears to support this “new” level of house price growth in its recent prediction of “just” 13.0% inflation over the coming five years with near terms forecasts of no change in 2017 and 2.0% in 2018.

Headline annual house price inflation at c. 5% some four months after the Vote and even estate agents suggesting further prospective inflation will provide more comfort to those who queried the doomsday scenarios. However, it may also focus the Treasury’s mind on its plans to further assist UK housing in the Autumn Statement, due on 23rd November. Following his speech at the Conservative Party Conference, and subsequent comments, the Chancellor appears to be moving towards supply-side initiatives such as a “Help to Build” fund for smaller developers rather than any further changes to the important “Help to Buy” equity loan scheme. The Government’s challenge is to be seen to be making progress on the long-standing shortage of housing stock in the UK. Continued house price inflation demonstrates that buyers remain but affordability, particularly for first time buyers, continues to erode. Increasing supply by helping smaller builders with financing seems a smart political and economic choice.

The continued growth in average prices is positive for new home builders. They are already supported by the Help to Buy scheme, which has provided considerable immunity from the volatility within the wider housing market. This scheme has also allowed a proportion of their customers to trade up in terms of price points. With underlying house price inflation, this has resulted and is expected to result in further growth in earnings and cash flow. The listed sector has been hit hard by concerns post Referendum but its constituents have consistently reported a robust market for new homes at higher prices, generating considerable returns in a benign cost environment.

Further political focus on housing should provide another reminder that building more homes remains a central plank of economic policy and that those that build them continue to improve their ability to deliver value to shareholders.