26 Jul PwC forecasts marked slowdown in UK housing market but no major crash
Article in PropertyWire 26 July Weekly 2016 (reproduced with permission of PropertyWire Weekly)
The UK should avoid a house price crash or a severe recession despite growth downgrades following the decision to leave the European Union, new research shows.
UK growth had already eased from around 3% in 2014 to around 2% before the EU referendum due primarily to slower global growth, but the vote to leave the EU is likely to lead to a significant further slowdown. UK GDP growth is forecast to decelerate to around 1.6% in 2016 and 0.6% in 2017 according to PwC’s main scenario in its latest UK Economic Outlook report.
Quarter on quarter GDP growth could fall to close to zero in late 2016 and early 2017 in this main scenario, but is then projected to recover gradually later in 2017 as the immediate post referendum shock starts to fade.
The UK would avoid recession in this scenario, although the report notes that uncertainties around this central view are significant, with alternative scenarios showing GDP growth in 2017 of anywhere between growth of 1.5% and a fall of 1%. But even this latter relatively pessimistic scenario would not be a severe recession of the kind seen in the early 1980s or in 2008/2009.
The main reason for the slowdown is projected to be a decline in business investment, particularly from overseas in areas such as commercial property. Construction companies and capital goods manufacturers could also be relatively exposed to this kind of short term cyclical slowdown, the report says.
PwC anticipates a marked slowdown in house price growth, but no major crash. In PwC’s main scenario, UK house price growth is expected to decelerate to around 3% in 2016 and around 1% in 2017. After this initial dip, however, projected house price growth picks up again to around 4% in 2018 and an average of around 5% to 6% per annum in the longer term as persistent supply shortages keep house prices rising faster on average than earnings.
PwC estimates that average UK house prices in 2018 could be 8% lower than if the UK had voted to stay in the EU, although this would still leave them 8% higher on average than in 2015.
The estimated impact of Brexit varies by region. The report says that average house prices in London could be around £60,000 lower due to Brexit than they would otherwise have been by 2018, in contrast to a reduction of £10,000 in Scotland and just £8,000 in the North East.
‘We think there are four main reasons why the Brexit vote will lead to a slowdown in the housing market in the short term: the deterrence of foreign investment, uncertainty regarding the future of EU nationals living in the UK, a reduction in consumer confidence and turbulence in the banking sector,’ said Richard Snook, senior economist at PwC.
‘While these factors will weigh heavily on the market in the short term, we expect a gradual recovery from 2018 onwards as market fundamentals reassert themselves,’ he added.
PwC’s research into housing affordability for generation rent, the 20 to 39 year old age group who are finding it increasingly difficult to get on the housing ladder, shows that buyers may have to save for as much as 19 years in order to buy their first home assuming the deposit has to be raised entirely from their own savings without family assistance. This has trebled since 2000 when the same group would have been able to buy after saving for just six years.
The analysis finds a huge disparity in outcomes between renters and those 20 to 39 year olds who have already managed to get a foot on the housing ladder. This second group who already managed to buy has been largely insulated from the deterioration in affordability due to capital gains made on their existing homes and continued relatively low mortgage rates. PwC estimates that someone buying their first home in 2016 could afford to step up to a larger property after only around four years, less than a quarter of the time it could take to save for an initial deposit as a renter.
‘Young people without family assistance may have to save for close to two decades to accumulate a deposit to buy their first home if they start saving today. This emphasises our country’s need to both build more homes and increase the quality of rented accommodation. Many people cannot rely on help from the bank of mum and dad to speed up the buying process,’ Snook added.