UK house prices “ripe for a correction”

Prices are 10 percent higher than what is sustainable, says Capital Economics

UK house prices “ripe for a correction”

UK house prices could be in line for a sizable and steep downward correction sometime over the next few years, if earnings fail to meet growth expectations, London-based economics research firm Capital Economics warned in a recent report.

Noting the discrepancy between the 50 percent increase in house prices since 2005 and the 23-percent increase in average earnings over the same period, the adviser calculated that prices appear “at least 10 percent higher than the sustainable level implied by average incomes and loan-to-income multiples”.

Capital Economics suggested that the overvaluation could be reversed in about five years, if wages grow by 3-4 percent and price growth slows down to 1-2 percent annually, as the adviser has forecast.

“Unless the economy lapses back into recession, or interest rates rise much further and faster than seems plausible, the early stages of any adjustment are most likely to occur in real terms, with house prices rising more slowly than incomes,” said the UK Housing Market Focus report by Capital Economics for January.

However, “if the interest rate environment were to deteriorate materially, we suspect that income multiples would also be scaled back, removing a crucial prop for prices. Accordingly, there is a real and growing risk that the market will suffer another sizeable correction at some point over the next few years."

Meanwhile, the Nationwide Building Society reported earlier this week that UK house prices increased by 0.3 percent in January and annual growth is broadly stable at 4.4 percent.

This takes the average price to £196,829 but the monthly rate of increase slowed from 0.8% in December, the report noted.

Robert Gardner, Nationwide's chief economist, pointed out that annual house price growth has remained in a fairly narrow range of 3-4 percent since the summer of 2015.

“As we look ahead, the risks are skewed towards a modest acceleration in house price growth, at least at the national level. The labour market appears to have significant forward momentum,” said Gardner. “The concern remains that construction activity will lag behind strengthening demand, putting upward pressure on house prices and eventually reducing affordability.”

Earlier this month, the National Association of Estate Agents said that the supply-demand imbalance will continue dominating UK residential property landscape, and that the market is “faced with a crisis”.

“If the supply, specifically of affordable housing doesn’t significantly increase in 2016, first time buyers will continue to feel driven out of the market,” Hayward said. “Our recent Housing 2025 report compiled with Association of Residential Letting Agents and Centre for Economics and Business Research found that by 2025, house prices are set to rise by 50 percent, … [which] will impact first time buyers, second steppers and last steppers, forcing many out of home ownership.”

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