09 January 2018

House prices rise by a modest 2.6% in 2017

  • UK annual house price growth ended 2017 at 2.6%, compared with 4.5% in 2016

  • London weakest performing region, with house prices down 0.5% year-on-year

  • Significant differences in regional affordability, but saving for a deposit remains challenging for most

Annual house price growth ended the year at 2.6%, within the 2-4% range that prevailed throughout 2017. This was in line with our expectations and broadly consistent with the 3-4% annual rate of increase we expect to prevail over the long term (which is also our estimate for earnings growth in the long run).

However, this marked a modest slowdown from the 4-6% rates of house price growth recorded in 2016. Low mortgage rates and healthy employment growth continued to support demand in 2017, while supply constraints provided support for house prices. However, this was offset by mounting pressure on household incomes, which exerted an increasing drag on consumer confidence as the year progressed.

The impact of previous policy changes (including additional stamp duty on second homes, changes to tax deductibility of landlord expenses and lending criteria) meant that demand from buy to let investors remained subdued in 2017.

The significant disparity in house prices across the UK has been a recurring theme in recent years. In this respect, 2017 saw the beginnings of a shift, as rates of house price growth in the south of England moderated towards those prevailing in the rest of the country.

London saw a particularly marked slowdown, with prices falling in annual terms for the first time in eight years, albeit by a modest 0.5%. London ended the year the weakest performing region for the first time since 2004.

Housing affordability across the regions

While regional house price growth rates have converged over the past year, there remain significant differences in affordability, reflecting disparities in house price levels.

To explore how this is impacting potential buyers we used regional income data to calculate where in the income distribution a prospective purchaser would lie if they were purchasing the typical first time buyer property in each region, with a 20% deposit and borrowing four times their (single) income.

The picture that emerges is that this ‘typical buyer’ moves up the income spectrum as you move from the north to the south of the country. In Scotland and the North of England, this buyer would lie in the 30th income percentile, while in the South East they would be at the 80th percentile and above the 90th percentile in London (the closest percentile with available data).

Earnings percentile graph 2017

The variation in affordability across regions has increased over the past ten years, as shown on the chart below. Affordability has improved in Wales, Scotland and the North of England, but the most marked improvement has been in Northern Ireland, where the typical buyer has moved from the 90th percentile to the 40th percentile. This is largely due to the significant correction in house prices in Northern Ireland, which are still around 40% lower than in 2007.

Earnings percentile graph 2007-2017

Meanwhile in London and the South East, affordability has become even more challenging, with more people priced out of the market or needing to borrow a greater multiple of their income.

Saving for a deposit remains tough for most

Another key aspect of affordability is the deposit required and the time taken to save it. As the chart below illustrates, a 20% deposit in London is now in excess of £80,000 (based on the average first time buyer house price).

This is around £30,000 higher than a decade ago. In other regions, such as the Midlands and Northern England, deposit requirements are similar to 2007, though it should be noted house prices were at or near their pre-crisis peak at this time.

Deposit requirement graph

It is arguably even more challenging to save for a deposit than it was a decade ago, due to falling real earnings (i.e. after taking account of inflation) and lower interest rates for savers. Based on the same incomes used for the earnings percentiles charts above, we have estimated the number of years it would take the ‘typical buyer’ to save a 20% deposit, based on saving 15% of net income (take home pay).

In most regions, it would take around 8 years for the typical buyer (as defined above) to save for a deposit. This rises to nine years in the South East and to nearly ten years in London, even though the prospective typical buyer in the capital is in the top 10% of the income distribution.

Saving 20% deposit graph

Looking ahead to 2018

How the housing market performs in 2018 will be determined in large part by developments in the wider economy. Brexit developments will remain important, though these remain hard to foresee.

We continue to expect the UK economy to grow at modest pace, with annual growth of 1% to 1.5% in 2018 and 2019. Subdued economic activity and the ongoing squeeze on household budgets is likely to exert a modest drag on housing market activity and house price growth.

Nevertheless, housing market activity is expected to slow only modestly, since unemployment and mortgage interest rates are expected to remain low by historic standards. Similarly, the subdued pace of building activity evident in recent years and the shortage of properties on the market are likely to provide ongoing support for house prices.

Overall, we expect house prices to record a marginal gain of around 1% in 2018. Over the longer term, once the economy regains momentum, we expect house prices to rise broadly in line with earnings (around 3%-4% per annum), though if the rate of house building fails to keep up with population growth, prices may outpace earnings once again, as they have in recent years.

As noted above, the UK housing market has been characterised by significant regional disparities in house prices in recent years and it is not clear how Brexit will impact these dynamics. Much will depend on the nature of the Brexit impact on the UK economy (in terms of its impacts on different sectors and the resulting geographic consequences).

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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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