06 December 2017

Annual house price growth steady in November

  • Annual house price growth stable at 2.5%
  • Modest 0.1% month-on-month increase
  • Limited impact from stamp duty changes

The annual rate of house price growth remained stable in November at 2.5%. Nevertheless, annual growth remains within the 2-4% range that has prevailed since March. Low mortgage rates and healthy rates of employment growth are providing support for demand, but this is being partly offset by pressure on household incomes, which appears to be weighing on confidence. The lack of homes on the market is providing support to house prices.

The decision in the Budget to abolish stamp duty (SDLT) for first time buyers purchasing a property up to £300,000 (with relief for those purchasing a property up to £500,000) is likely to have only a modest impact on overall demand. In many regions, first time buyers already paid little or no stamp duty as the price of the typical first time buyer property was below the previous threshold of £125,000.

Stamp duty table

The potential savings are more substantial for borrowers where house prices are higher, especially in London and the South East. However, as the Office for Budget Responsibility noted, some of the benefit is likely to be passed on to existing home owners through higher house prices, though overall impact on prices is likely to be very modest (the OBR estimate they may be increased by c.0.3%, mostly in 2018).

Housing supply - encouraging signs

The focus on boosting housebuilding in the Budget is important, as a shortage of homes is a key reason why affordability is so stretched in large parts of the country. A wide range of measures were announced to deliver an additional 300,000 homes per year by the mid-2020s.

The long timeframe reflects the scale of the challenge ahead, although there have been some encouraging signs that the number of homes has been rising faster than previously thought in recent years.

Construction of new build properties is still too low – with completions in England over the past 12 months c13% below 2007 levels. But, the picture improves significantly if we add in new dwellings that have been created by converting larger homes into more units and those created by ‘change of use’, such as offices transformed into flats. Indeed, on this broader measure, the number of dwellings being created each year is now only 3% lower than the levels recorded in 2007 (even after accounting for demolitions).

Interestingly, it is ‘change of use’ of buildings – i.e. from shops, offices and other commercial purposes, to homes - which is providing the biggest boost, driven by a shift in government policy. From 2014, automatic permitted development rights were granted to convert offices into residential properties. Since then, so called ‘change of use’ additions to housing have nearly doubled, from c20,000 in 2006/07 to 37,000 in 2016/17. Of these, about 18,000 were granted under the new permitted development rights.

Where is ‘change of use’ making the most significant contribution?

This policy change has provided a particularly strong boost to housing supply in London, where the increase in dwellings each year is now 22% higher than at the 2007/08 peak (see chart).

Dwellings graph

In London, homes created by ‘change of use’ accounted over a fifth of new dwellings added in the capital in 2016/17, well above the 16% recorded in the rest of England (i.e. excluding London).

While across the UK the price of housing and residential land is higher than the price of commercial property and commercial land, in London the gap is sufficiently large to dwarf conversion costs and make the developments very profitable.

Other cities with expensive housing and limited supply also appear to be benefitting from the policy change. For example, in Bristol, net change of use accounted for the majority of new housing supply in 2016/17, with 1,040 additions from ‘change of use’ versus 900 new builds.

Is this the answer to the UK’s housing problem?

While this is an encouraging development, we shouldn’t overstate its significance. The growth in ‘change of use’ may well slow in future years, as developers have probably converted the easiest sites and the stock of suitable commercial property will reduce. The quality and long-term suitability of some of these changes of use remains to be seen.

Therefore, while the recent data is encouraging, there is still a lot that remains to be done in tackling the UK’s housing supply issues. For this reason, the focus in the Budget on increasing supply of homes in the year ahead was encouraging.

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About the author

Robert Gardner

Robert Gardner is Nationwide’s Chief Economist, leading a team which provides economic analysis and advice, focused on developments in the UK economy, with particular emphasis on the housing market and house prices.

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