UK’s house price to income ratio is at 6.1 times earnings
A rise in interest rates is a ‘distant prospect’ but whenever the cost of borrowing starts to rise, house prices will ‘inevitably’ anter a sharp correction, a new report forecasts.
‘Lower for longer’ rates of interest are inflating the housing bubble, with the average property price currently at more than six times average earnings, ‘within a whisker’ of its pre-financial crash peak, according to research by Fathom Consulting.
However, a prices would inevitably plunge when interest rates rise, the think-tank said.
‘Real mortgage rates will not remain as low as they are today, and when they do rise, the fragile arithmetic supporting the elevated house price to income ratio will unravel.
‘All the while, “lower for longer” rates of interest are inflating the housing bubble and worsening the inevitable correction.’
The report also stated that if the UK were to vote to leave the European Union, it would entail a toxic combination of both weaker economic growth and higher inflation.
‘But we believe that concerns about triggering an even deeper economic contraction will mean that the MPC will look through any deviation in inflation from its 2 per cent target — just as it did through 2008 to 2009, and again through 2011 and 2012’, the report added.
The think-tank said that, if the UK votes to remain within the EU, the government refrains from further housing market intervention, and the Bank of England remains reluctant to raise rates, they expect house prices to rise by 6.9 per cent in 2016, softening to 4.3 per cent in 2017.
Meanwhile, house prices in Britain’s 20 biggest cities continued to see double digit growth in April, but a UK exit from the EU would ‘undoubtedly’ cause a slowdown in prices and sales, a separate report has revealed.
If the UK were to vote for ‘Brexit’ there could be a 5 per cent to 10 per cent reduction in housing transactions that would particularly impact London, the Hometrack report said.
The group’s analysis of property sales in big cities over the past 20 years suggests that property sales volumes are more responsive to external shocks than prices.
Hometrack said: ‘Uncertainty amongst consumers over the outlook for the economy and personal finances tend to have a greater impact on the volume of housing transactions rather than house prices.’
However, it added that the effect of a UK exit from the EU would be felt on both prices and transactions, although the extent of it would depend on the overall economic impact on things such as interest rates, investment and incomes.
‘The rate of national house price growth would undoubtedly slow, but the scale of this will depend upon the economic impact and whether mortgage rates increase,’ the report said.
‘The greater the direct impact on the economy then the greater the downside for turnover and house prices. If the economy keeps growing, albeit more slowly, negative price growth is unlikely,’ it added.
Richard Donnell, insight director at Hometrack, said that the acceleration in growth in the last quarter had, in part, been down to stronger demand from buy-to-let investors, especially those searching for higher-yielding property and rushing to beat the stamp duty deadline hike in April.
‘With that deadline now passed, the question is how weaker investor demand will impact house price inflation in the second quarter of 2016. Especially at a time when home buyers start to consider the implications of the EU referendum for the economy and mortgage rates’, he added.
Looking at the potential impacts of the looming EU referendum, Hometrack said that London would be the worst hit from a Brexit.
On the other hand, a vote to remain would see house prices and transactions rise most in regional cities where the recovery has been more short-lived and affordability less stretched than in southern cities.
‘The boost to confidence from a vote to remain, coupled with low mortgage rates would most likely deliver the greatest benefit regional cities such as Manchester, Leeds and Birmingham where housing demand is growing and strong real rates of house price growth are likely to be sustained,’ Mr Donnell said.