19 December 2016
Robert Gardner, Nationwide’s Chief Economist, comments:
“House price growth remained in a fairly narrow range between four per cent and six per cent throughout 2016 in line with our expectations, and only slightly above the three to four per cent we would expect to prevail over the longer term (our estimate for earnings growth over the long run).
“A number of policy changes made it difficult to gauge the underlying strength of housing demand for much of 2016. In particular, the imposition of additional stamp duty on second homes in April led to a record number of property transactions in March as people brought forward purchases to avoid additional tax liabilities, resulting in an inevitable fall back in activity during the summer.
“The picture was further obscured by the gyrations of some forward-looking indicators of economic activity and consumer sentiment in the wake of the Brexit vote, where a number of indicators recorded large, but short-lived, declines.
“However, what made the most difference to the market in 2016 was that the fundamentals underpinning housing demand remained solid. Labour market conditions were robust, with strong employment growth, healthy gains in real wages (thanks in part to low inflation) and borrowing costs falling to new record lows.
“The relative stability in the rate of house price growth throughout 2016 suggests that softening in housing demand that we saw through the summer months was broadly matched on the supply side of the market.
“Survey data indicates that, while new buyer enquiries have remained fairly subdued, the number of homes on the market has remained close to all-time lows, in part due to low rates of construction activity. In fact, the number of new homes built in England has picked up, but is not sufficient to keep up with the expected increase in the population. In the four quarters to Q3 2016, 142,000 new homes were completed, 33% higher than the low point seen in 2010. However, this is still around 12% below the average rate of building in the five years before the financial crisis and 37% below the 225,000 new households projected to form each year over the coming decade.
“Looking forward, house price prospects will depend crucially on developments in the wider economy, around which there is a larger degree of uncertainty than usual.
“Like most forecasters, including the Bank of England, we expect the UK economy to slow modestly next year, which is likely to result in less robust labour market conditions and modestly slower house price growth.
“But we continue to think a small gain (around two per cent) is more likely than a decline over 2017 as a whole, since low interest rates are expected to help underpin demand while a shortage of homes on the market will continue to provide support for house prices.
“The major housebuilders appear to have capacity to expand output, with most reporting land banks that could support around five years’ worth of construction at current rates of building activity. However, there is a risk that the uncertain economic outlook may weigh on activity in the period ahead.”