House prices set to grow by 3.5% in the UK in 2017

House price rises in the UK will slow in 2017 but a crash is highly unlikely due to a sound economic outlook despite Brexit, according to a new analysis.

Stability in the housing market is predicted throughout the year with house price inflation slowing to 3.5%, says the forecast from economists at Lancaster University Management School.

The data from the Housing Market Observatory from the University has analysed house prices retrospectively since October 2015 and now has produced a forecast with the results for the first time.

It suggests that house prices nationally and all regional property markets will grow this year but at 3.5% this will be slower than the 4.4% recorded in 2016. In London the forecast is slightly higher at 3.9% while East Anglia is likely to have the highest growth at 5.7%.

Despite some economists predicting a price crash in 2017, the report says that the two main factors responsible for the positive forecasted growth in the housing market are sound domestic economic conditions and the fall in the real mortgage rate mainly due to the recent rise in the inflation rate.

In producing the forecasts, the researchers considered 10 economic variables as potential predictors of future house price, namely four regional level and six national level predictors.

The variables measured at the regional level include the price to income ratio, income growth, the unemployment rate, and the growth in the labour force whilst national level predictors consist of the real mortgage rate, the spread between yields on long term and short term government securities, growth in industrial production, the number of housing starts, growth in real consumption, and an index of credit conditions which captures changes in lending policies and easing/tightening of prudential regulation.

In addition to those variables they also incorporated a structure of property price growth in contiguous regions to capture the effect of spatial correlation in house prices within the UK.

In regional housing markets, the predicted patterns of property price behaviour vary. The expectation about the future interest rate increases, which is an important determinant of housing dynamics in London but not in the other regional markets, puts a downward pressure on the house price growth in this region.

According to the forecasting results, housing inflation in London will slow down in the first quarters of 2017, but the growth in property prices is predicted to build up towards the end of the year. Overall, the forecasts indicate a 3.9% growth in London property prices in the course of 2017.

The property market in East Anglia, which is currently growing faster than any other regional market, is predicted to slow down in 2017 but still have the strongest growth at 5.7%.

The UK Housing Observatory is a project of the Economics Department at Lancaster University Management School (LUMS) aimed at improving our understanding of the UK national and regional housing markets.


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