3 – UK Housing market outlook - PwC UK

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3 – UK Housing market outlook Key points • House prices in the UK were not impacted by the UK’s decision to leave the EU as quickly as expected, though price growth stalled in the second half of 2016 and is now showing signs of a slowdown. Transaction volumes appear to have suffered more, but these effects are compounded by other factors such as stamp duty reform. • We anticipate that the rest of 2017 will see the slowdown in the housing market continue, yielding annual house price growth of around 3.7%, down from 7% in 2016. In our main scenario, house price inflation will pick up slightly again in later years averaging around 4% until 2025. We find that housebuilding at the level proposed by the government, although welcome, may only have a small effect in constraining house price rises in the short term. • The London housing market has been most severely impacted by economic and policy uncertainty and the recent changes to stamp duty. Price inflation in London in the first four months of 2017 was around 4% compared with around 13% for the same period in 2016. We project that London’s housing market will continue to slow with only 2.8% and 3.8% house price growth on average in 2017 and 2018 respectively.

• Elsewhere in the UK, the East and Southern regions of England will continue to grow above the UK average, but Northern Ireland and the North East will continue to lag behind. • There is a huge disparity in how sub-regional housing markets have performed since the recession. Whilst the average house price across the UK has grown by 17% since mid-2007, over a quarter of all local authorities are still ‘under water’. The region that has seen the greatest decline is Northern Ireland, where on average house prices are 44% below their pre-recession peak.

Introduction In this section, we explore how the UK housing market has been performing recently and present our projections for house price inflation until 2025. We also present new analysis of regional and sub-regional trends in the market showing the shifting patterns of growth since the recession. The discussion below begins by briefly reviewing recent housing market developments (Section 3.1) and then goes on to assess future UK and regional house price prospects in Section 3.2. Section 3.3 presents our new research into the development of sub-regional markets.

• There has also been a structural shift in London’s housing market recently, as house price growth has moved outward from the capital. Growing unaffordability within London, coupled with policy reform, has seen house price rises in prime central boroughs slow whilst price rises in the outer boroughs and the commuter belt have accelerated. Over the last two years, house prices in the outer boroughs have risen 9 percentage points faster than inner boroughs, whilst house price growth in the fastest growing cities within the commuter belt exceeded that in London by 4 percentage points in 2016.

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Brexit appears to be a drag on price growth, but the effects have come through more slowly than expected

15

EU Referendum

10 5 0 -5 -10 -15 -20 Jan 2006

As shown in Figure 3.1, house price inflation slowed in 2016, falling from 8.2% year-on-year in June to 5.2% in December. But it still averaged 7% for the year as a whole, equating to an average UK house price of £198,000 in 2016.

Source: ONS

Soft end to 2016 suggests loss of momentum in the market

Cumulative percentage growth relative to previous December

Shortly after the UK’s decision to leave the EU last summer we predicted that house price growth would fall to around 3% in 2016 and slow further in 2017. The market did not respond as quickly as we and most other forecasters expected, but we are now seeing a pronounced slowdown in house price growth.

Figure 3.1 – Annual rate of house price inflation

Year-on-year % change

3.1 – Recent housing market developments

The latest available ONS house price inflation figures registered growth of 5.6% in April. Whilst this headline figure appears robust, it masks the fact that the market was broadly flat in the second half of 2016 (see Figure 3.2 below). 2017 also started softly but a strong April has brought it in-line with the 2016 profile. A rapid acceleration in prices over the spring will be required to avoid a sharp drop in the annual house price inflation rate. This may be unlikely given that alternative data providers on the housing market such as Nationwide and Halifax have reported price growth slowing more sharply than the ONS so far this year.

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UK Economic Outlook July 2017

Jan 2007

Jan 2008

Jan 2009

Jan 2010

Jan 2011

Jan 2012

Jan 2013

Jan 2014

Jan 2015

Jan 2016

Jan 2017

Sep

Oct

Nov

Dec

Figure 3.2 – Cumulative house price inflation by year 10 8 6 4 2 0 -2

Jan 2014

Source: ONS

Feb

Mar 2015

Apr 2016

May 2017

Jun

Jul

Aug

3.2 – House price prospects

Figure 3.3 – Annual growth in UK housing transactions 100

EU Referendum Stamp duty reform effective

80

Year-on-year % change

60 40 20 0 -20 -40 -60 -80 Jan 2006

Jan 2007

Jan 2008

Jan 2009

Jan 2010

Jan 2011

Jan 2012

Jan 2013

Jan 2014

Jan 2015

Jan 2016

Jan 2017

Source:

Housing transactions are declining Housing transactions, which tend to be more volatile than prices, are where the uncertainty caused by Brexit has manifested itself most strongly, in combination with effects of recent reforms to stamp duty. As shown in Figure 3.3, the latest data show year-on-year transaction growth has been negative for twelve consecutive months. Only 132,000 transactions were completed in the first two months of 2017 compared with 155,000 for the same period in 2016. The gap widens further if March is included, but this comparison is distorted by the temporary surge in transactions in March 2016 to beat the introduction of the 3% extra stamp duty charge for additional homes in April 2016.

In this section, we present our projections for house price inflation in the UK and regional markets. We use econometric time-series models to make our predictions. These link house prices to underlying drivers in the housing market and the economy more generally, such as earnings growth, housing supply and credit conditions, and use these relationships to project how prices may evolve going forward1. In our main scenario we assume that real earnings growth will remain close to zero in 2017 and 2018, down slightly on the 2016 figure as inflation continues to rise. We project that real earnings growth will recover slightly after 2019 and reach about 1.5% per annum by 2021. Informed by the Council of Mortgage Lenders’ forecast we also expect credit conditions to remain fairly neutral and mortgage lending to grow modestly over the next four years. We assume that the housing supply growth increases slightly over the projection period, equating to growth in the UK housing stock of around 0.9% a year.

1 Further details are provided in the technical annex at the end of this article

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In our main scenario, we project that house prices in the UK will grow at an average of around 3.7% this year. This is slightly less pessimistic than our projection of around 1% for 2017 made this time last year, in light of the less severe impacts of Brexit manifested thus far. In the medium term, house prices are expected to grow at a slightly higher average rate of around 4% a year as earnings growth is assumed to strengthen. This would imply that house prices continue to outstrip earnings growth as a result of continued structural weakness in supply.

Figure 3.4 – UK house price inflation main scenario projection 20 15

Year-on-year % change

House price growth slows in 2017 but price-to-earnings ratio still growing

10 5 0 -5 -10 2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

Source: ONS house price index historical data, PwC projections

Table 3.1: UK main scenario house price inflation and average house prices

Our analysis suggests that the average residential property in the UK could be worth approximately £220,000 in 2017, £8,000 higher than in 2016, and could rise to over £300,000 by 2025. Turning to the regional picture, we expect to see some significant changes with London in particular experiencing substantial headwinds. The capital city has seen the highest house price inflation of any UK region in eight out of the last ten years. But we expect this trend to reverse in 2017 and 2018 due to challenging affordability and London’s status as the UK’s most outward-facing region with the greatest exposure to the risks of Brexit.

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UK Economic Outlook July 2017

Year

Main scenario (% growth)

Main scenario (£)

2016 (Actual)

7.0%

£212,000

2017

3.7%

£220,000

2018

3.9%

£228,000

2019

3.9%

£237,000

4.1% average growth

£302,000 in 2025

2020-2025

Source: PwC analysis based on ONS house price index

Box 3.1 – Will building a million homes solve the affordability crisis?

The Government’s recent White Paper on housing2 opens with the statement that “the housing market in this country is broken, and the cause is very simple: for too long, we haven’t built enough homes.” This view is widely held and has been the subject of significant commentary and analysis – notably the Barker Review of Housing Supply, published as long ago as 2004. The White Paper concluded that the UK needs 250,000 new homes a year and the current Government has committed to this target by promising to build a million homes by 2020 and another half a million by 2022. Achieving this target would undoubtedly be welcome, but to what extent will it help affordability? We have used our house price model to simulate what the impact could be. Over the past three years, approximately 190,000 new homes have been built annually in the UK, 26% more than in the preceding three year period. In our main scenario we project that this upward trend will continue with new build completions reaching around 216,000 by 2020. This equates to growth in the UK housing stock of around 0.9% per year. We compare the price projections from our main scenario to a scenario where 250,000 houses are built each year (which would raise growth in the housing stock to around 1.1% per annum). The results are shown in Table 3.3 below.

Table 3.3: UK house prices– the potential impact of increased supply Year

House prices, PwC main scenario

House prices, additional building scenario

Difference

2016 (Actual)

£212,000

£212,000

N/A

2017

£220,000

£220,000

No change*

2018

£228,000

£228,000

No change*

2019

£237,000

£237,000

No change*

2020

£247,000

£246,000

£1,000

2021

£258,000

£256,000

£2,000

2022

£268,000

£266,000

£2,000

2023

£279,000

£276,000

£3,000

2024

£290,000

£287,000

£3,000

2025

£302,000

£297,000

£5,000

Source: PwC analysis using the ONS house price index and DCLG net supply of housing * No change after rounding to nearest £000

Our results suggest that an increase in building of this magnitude would restrict future house price growth slightly, but not fundamentally change the affordability picture. The cumulative effect of the additional building scenario is estimated to be only around £5,000 by 2025.

The reason is that the UK has been building too few houses for the last 40 years and to undo this would require a similarly prolonged period of above average new building. Our analysis suggests that simply achieving the par level of building for 7-8 years will have only a limited impact on the supplydemand balance and so on prices.

2 DCLG (2017), “Fixing our broken housing market”

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Figure 3.5 – Projected house price inflation in UK regions 2017 and 2018 6

Year-on-year % change

5 4 3 2 1 0 East of England

Yorkshire & The Humber

2017

2018

South West

West Midlands

UK average 2017

London

North West

South East

North East

East Midlands

Wales

Scotland

Northern Ireland

UK average 2018

Source: PwC analysis based on ONS house price index

London expected to be amongst the weakest performing regions House price growth in London in the first four months of this year was less than a third of the equivalent in the first four months of 2016 – averaging around 4% compared with 13% growth in the same period last year. It is important to note, however, that house prices in London still remain significantly higher than in other regions and the average value of a home in London is set to surpass half a million pounds in the next few years. We expect the strongest price growth in the UK to be in the southern regions of England and the Midlands. The East of England is projected to see the fastest house price growth in 2017, at just over 5%, with Northern Ireland and the North East the weakest performing. Table 3.2 and Figure 3.5 indicate the projected house prices and growth rates for all of the UK regions between this year and 2020.

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UK Economic Outlook July 2017

Table 3.2: Regional house price growth and house price values (£000’s) in the main scenario Region

2016

2017P

20182020P Average

2016

2017

2020P

East of England

12.2%

5.3%

4.3%

266

281

319

East Midlands

6.9%

4.7%

4.4%

170

178

202

South West

8.4%

4.7%

4.5%

233

244

279

West Midlands

6.2%

4.5%

4.3%

175

183

208

South East

12.1%

4.2%

4.1%

304

317

358

North West

4.8%

3.7%

4.0%

147

153

172

London

14.0%

2.9%

3.9%

468

481

539

Wales

4.3%

2.7%

3.7%

144

148

165

Scotland

-0.2%

2.5%

4.0%

139

142

160

Yorkshire & The Humber

5.6%

2.8%

3.7%

149

153

171

Northern Ireland

5.9%

1.0%

2.6%

123

124

134

North East

3.4%

0.8%

2.9%

124

125

137

UK average

7.0%

3.7%

3.9%

211

219

247

Source: PwC analysis based on ONS house price index

Projecting house prices involves many uncertainties, especially in the current period where the UK is likely to undergo major structural changes due to Brexit. To reflect this we always develop two alternative house price inflation scenarios based on different inputs for the model drivers (see Figure 3.6). Our high scenario reflects a stronger macroeconomic environment where earnings growth returns to rates expected prior to the decision to leave the EU and mortgage credit growth is more robust. In this scenario, house price growth could be somewhat stronger in the short term, potentially growing at around 5% instead of 3.7% in 2017, and could be quite significantly stronger in the medium term with average growth of approximately 7% between 2020 and 2025. This scenario would mean that the average UK house price could reach around £370,000 by 2025. Our low scenario reflects a more severe impact from Brexit on earnings growth, which we assume remains very weak in the medium term. The scenario also supposes tighter credit conditions. In this low scenario, house price inflation could average only around 1% a year in the medium term.

Figure 3.6 – Alternative house price inflation scenarios 20 15

Year-on-year % change

Alternative UK house price scenarios

10 5 0 -5 -10 2000

2002

2004

Main Scenario

2006

2008

2010

High Scenario

2012

2014

2016

2018

2020

2022

2024

Low Scenario

Source: PwC analysis based on ONS house price index

3.3 – Sub-regional housing trends

In a quarter of UK local authorities, house prices remain below prerecession peaks

The creation of the new official house price measure from the ONS and Land Registry last year has generated a new sub-regional set of data on the UK market. In this section, we present three themes that we have identified by analysing these figures:

It is widely accepted that there is an affordability crisis in the UK housing market. Whilst this is true at the aggregate level, given that measures like house price to earnings ratios are at record highs, there have been marked differences in regional market trends since the financial crisis.

1. Despite the general perception of a UK affordability crisis, in around one quarter of local authorities house prices are still lower on average than they were 10 years ago. 2. The London market has seen a significant structural shift over the course of the last ten years, with growth radiating out from inner to outer boroughs. 3. More recently the challenging affordability outlook in London has seen demand, and therefore the strongest house price growth, spill over to towns and cities in the London commuter belt.

The top of the pre-crisis house price cycle came in September 2007, but as Figure 3.7 illustrates, prices in many local authority areas clustered in Northern Ireland, Wales, Scotland, and in the North of England have still not surpassed this peak almost ten years on. In contrast, no local authorities in the South East, South West, Eastern or London regions have average house prices that are still below their prerecession peak levels. In the highest growth local authorities, prices have almost doubled over the same period.

In the remainder of this section we explore these trends in more depth.

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Figure 3.7 – Local authority areas where house prices are still below pre-crisis peak levels in 2007

There is a 78 percentage point gap between the best and worst performing Scottish local authority. House prices in the Shetland Islands rose by 59% since 2007 whilst Inverclyde’s fell by 19%.

Northern Ireland has seen the sharpest decline in house prices. The average house in the region is 44% cheaper than in 2007.

Liverpool has failed to surpass its pre-recession peak, seeing a decline of 5% since 2007.

London has seen the highest rise in house prices since 2007 averaging a 63% price increase.

-46% to -19%

-19% to -10%

-10% to -5%

-5% to 0%

Sources: ONS/Land Registry, PwC Analysis *Please note: The map above compares the 3 month average of house prices during their UK peak in 2007 (July-September), and measures them with the 3 month average of current house prices (February – April 2017).

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0% to 95%

Northern Ireland has experienced the greatest house price declines The local authorities that have experienced the greatest falls in house prices since 2007 are all based in Northern Ireland. Part of this is due to the Irish property bubble, which spilled north of the border, stoking unsustainable house price gains of 78% between 2005 and 2007 in Northern Ireland. When the crash came it was far more severe there than in any other part of the UK. Prices still remain far below their 2007 peak: the largest gap is found in Armagh Banbridge and Craigavon, where prices remain 47% below peak levels. The weakest house price performance beyond Northern Ireland has been in the North of England (see Table 3.4). Hartlepool has experienced the greatest price decline of any English authority (-21%), while Inverclyde has seen the largest price decline in Scotland (-19%). These trends have boosted affordability for first time buyers in these areas in particular. In Blackpool, for example, the average house price to earnings ratio has fallen from 6.2 in 2008 to 4.9 in 2016. County Durham has seen a decline in this ratio from 5.1 in 2008 to 4.4 in 2016. This is in contrast to England as a whole, where the house price to earnings ratio has risen from 6.9 in 2008 to 7.7 in 2016. By way of contrast, we show the highest growth local authorities in Table 3.5. London dominates with all boroughs experiencing price growth of over 50%. The Shetland Islands3 and areas of the East and South East that are close to London round out the top ten.

Table 3.4: Areas experiencing the greatest house price declines (2007 – 2017) Region

Local Authority

Price change relative to pre-recession peak

All local authorities in Northern Ireland

Declines vary from -47% in Armagh Banbridge and Craigavon to -39% in Derry and Strabane

North East

Hartlepool

-21%

North East

County Durham

-19%

North West

Burnley

-19%

Scotland

Inverclyde

-19%

North West

Blackpool

-18%

Scotland

East Ayrshire

-17%

Scotland

North Ayrshire

-17%

Hyndburn

-14%

West Dunbartonshire

-13%

Sunderland

-13%

Northern Ireland

North West Scotland North East Source: ONS/Land Registry, PwC Analysis

Table 3.5: Areas experiencing the greatest price increase (2007 – 2017) Region

Local Authority

Price change relative to pre-recession peak

London

All London boroughs

Increases range from 51% in Havering to 95% in Westminster

Scotland

Shetland Islands

59%

East

Cambridge

59%

East

Hertsmere

58%

East

St Albans

57%

East

Three Rivers

56%

South East

South Bucks

55%

South East

Slough

55%

East

Broxbourne

53%

East

Watford

52%

East

Dacorum

51%

Source: ONS/Land Registry, PwC Analysis

3 Property prices in the Shetland Islands have risen rapidly as a result of strong oil prices in the years after the financial crisis and efforts to diversify considerably in response to softer oil prices since mid-2014, which have supported income levels.

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London’s outer boroughs begin to outperform its inner boroughs4 Over the past two years, there has been a major structural shift in the pattern of price growth within the capital. As shown in Figure 3.8, from 2007 to 2014, central boroughs such as Kensington and Chelsea and Westminster saw the greatest increase in average house prices of 71% and 79% respectively. In contrast, Havering and Barking and Dagenham only achieved price growth of 15% over this seven year period.

Figure 3.8 – Relative cumulative house price rises in London boroughs (2007-14)5

ENFIELD

BARNET

HARROW

HARINGEY

HILLINGDON

BRENT

CAMDEN

WALTHAM FOREST

REDBRIDGE

ISLINGTON HACKNEY

HAVERING NEWHAM

EALING

WESTMINSTER

CITY OF LONDON

BARKING AND DAGENHAM

TOWER HAMLETS

KENSINGTON AND CHELSEA

HOUNSLOW

SOUTHWARK

RICHMOND UPON THAMES

WANDSWORTH

KINGSTON UPON THAMES

LAMBETH

30%-40%

BEXLEY

MERTON

SUTTON

15%-30%

GREENWICH LEWISHAM

40%-55%

CROYDON

55%-65%

BROMLEY

65% +

Sources: ONS/Land Registry, PwC Analysis

4 We use the ONS’s statistical definition to classify London boroughs to inner boroughs and outer boroughs. Inner boroughs: Camden, City of London, City of Westminster, Hackney, Hammersmith, Haringey, Islington, Kensington, Lambeth, Lewisham, Newham, Southwark, Tower Hamlets, Wandsworth. Outer boroughs: Barking and Dagenham, Barnet, Bexley, Brent, Bromley, Croydon, Ealing, Enfield, Greenwich, Harrow, Havering, Hillingdon, Hounslow, Kingston upon Thames, Merton, Redbridge, Richmond upon Thames, Sutton, Waltham Forest. 5 The map above compares the percentage difference between the average house price in London boroughs during their 2007 peak (July-September) and the 3 month average of house prices prior to the first major stamp duty reform (October – December 2014).

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Stamp duty reforms and affordability have dampened the inner London market But this trend has gone into reverse since the end of 2014, with outer boroughs markedly outperforming their central London counterparts (see Figure 3.9). The stamp duty changes introduced in December 2014, which significantly increased transaction taxes on properties worth more that £937,000 (the average price of a property in Westminster is £1,051,000), have undoubtedly had an impact.

Figure 3.9 – Relative cumulative house price rises in London boroughs (2014-17)6

ENFIELD

BARNET

HARROW

HARINGEY

HILLINGDON

BRENT

CAMDEN

REDBRIDGE

ISLINGTON HACKNEY

HAVERING NEWHAM

EALING

WESTMINSTER

CITY OF LONDON

BARKING AND DAGENHAM

TOWER HAMLETS

KENSINGTON AND CHELSEA

HOUNSLOW

This was followed up with another reform in April 2016: applying an additional 3% stamp duty charge for purchases of second homes and additional properties. Taken together, the buyer of a £1.5m property could pay up to £138,750 in tax after the reforms, almost twice the previous bill of £75,000. Demand in these prime central London markets may also have also been impacted by other recent events like Brexit and softer oil prices since mid-2014 limiting demand from Russia and the Middle East.

WALTHAM FOREST

SOUTHWARK

RICHMOND UPON THAMES

WANDSWORTH

KINGSTON UPON THAMES

LAMBETH

7%-12%

12%-18%

BEXLEY

MERTON

SUTTON

1%-7%

GREENWICH LEWISHAM

18%-24%

CROYDON

BROMLEY

24% +

Sources: ONS/Land Registry, PwC Analysis

Prices in outer London boroughs have powered ahead since 2014 From 2014-2017, we see outer boroughs growing at a markedly faster rate than inner boroughs (see Figure 3.9). In particular, boroughs in the North East of London, such as Barking and Dagenham and Havering, have seen the highest rise in house prices over the past two years at 31%. The slowest growing are Kensington and Chelsea and Islington, which have only seen rises of 3% and 4% respectively. On average, we find that house prices in outer boroughs have grown 9 percentage points faster than inner boroughs during this period.

6 The map above compares house prices from a 3 month average prior to the first major stamp duty reform (October – December 2014) to a 3 month average of the latest data available (February – April 2017).

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Figure 3.10 – Difference between house price inflation in the 15 fastest growing commuter belt cities and London 10

Year-on-year % change

8 6 4 2 0 -2 -4 -6 -8 -10

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Source: ONS, PwC analysis 2017 value represents year to date figures up to April

Commuter belt cities begin to outperform London for price growth

London prices hit by the affordability crisis

The fastest growing commuter towns and cities

The final theme we highlight in this section is that the outward shift in demand within the London boroughs is beginning to be seen beyond the boundaries of the capital. Many towns and cities within the commuter belt have recently experienced stronger price growth than London.

One of the primary reasons for this is the affordability crisis within London, which has seen first-time buyers in particular struggling to buy in the capital. In 2016, house prices in London were 13 times median earnings, while the 15 commuter belt towns offer a lower (albeit still high) ratio of 9 times earnings.

In Figure 3.11, we present the top performing commuter towns and cities in 2016 and 2017 so far. The areas with the fastest growth rates are situated to the North and East of London, with Basildon and Rochford recording 11% annual growth in the first four months of 2017. Overall Essex appears to be the key hotspot, probably because house prices there have been lower than those in commuter towns west of London.

Figure 3.10 shows the difference in house price growth between 15-high performing commuter areas and London. London achieved stronger growth over much of the period, including the late 1990s and 2006 to 2014. However, since 2015, the commuter towns and cities have significantly outperformed London with average growth 4 percentage points faster in 2016 and 6 percentages faster in 2017 so far.

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UK Economic Outlook July 2017

Cost may explain the lack of high growth towns and cities in 2016-17 to the South West of London. Areas like Guildford and Woking had average prices of £411,000 and £444,000 respectively in April 2017. This was not far below the London average of £483,000, so people seeking an affordable option may need to look elsewhere.

Figure 3.11 – The fastest growing commuter towns and cities by house price growth (2016 - 2017)7

Stevenage 2016: 17% | 2017: 8%

Braintree 2016: 11% | 2017: 11%

Luton 2016: 18% | 2017: 10%

Colchester 2016: 11% | 2017: 10%

Harlow 2016: 16% | 2017: 11%

Brentwood 2016: 14% | 2017: 9%

Watford 2016: 16% | 2017: 11%

Basildon 2016: 16% | 2017: 11%

Wycombe 2016: 13% | 2017: 8%

Rochford 2016: 13% | 2017: 11%

Slough 2016: 19% | 2017: 8%

Southend-on-Sea 2016: 13% | 2017: 10%

London 2016: 10% | 2017: 4%

Ashford 2016: 10% | 2017: 11%

Dartford 2016: 13% | 2017: 10%

Hastings 2016: 14% | 2017: 7%

14%-20%

20%-22%

22%-24%

24% +

Sources: ONS/ Land Registry

3.4 – Summary and conclusions UK house price growth was not affected by the Brexit vote as quickly as expected, but headwinds have been evident towards the end of 2016 and during the first months of this year. We anticipate that house price inflation will be more modest going forward. However, in our main scenario, the house price-toearnings ratio will continue to grow and even achieving 250,000 new homes per year is unlikely to provide a quick fix for this affordability problem given many decades of undersupply.

London has seen a slowdown in its housing market over the past two years, particularly within the prime central boroughs, linked to severe affordability concerns, stamp duty changes and probably also the greater extent to which economic and political uncertainty impacts the prime central London market. House prices in the UK have grown fastest in the past 2-3 years in the outer boroughs of London and cities located in London’s commuter belt.

Our model indicates that the East and Southern regions of England will continue to outperform house price growth in London and be the prime engine of UK house price growth over the next few years. By contrast, Northern Ireland and some parts of Northern England and Scotland still have average house prices below their pre-crisis 2007 peaks.

7 We use January – April 2017 figures to measure our 2017 price growth, as this is the latest data available

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Annex

Supplementary data on local house price trends Table 3A.1: House price by London borough, % change 2007-2014 and 2014-2017 Rank 2007-14

Borough

% Change

Rank 2014-17

Borough

% Change

1

Westminster

79%

1

Barking and Dagenham

31%

2

Kensington and Chelsea

71%

2

Havering

31%

3

City of London

64%

3

Newham

30%

4

Camden

59%

4

Hillingdon

28%

5

Hackney

57%

5

Bexley

28%

6

Southwark

53%

6

Enfield

27%

7

Hammersmith and Fulham

50%

7

Redbridge

27%

8

Islington

49%

8

Waltham Forest

26%

9

Haringey

46%

9

Croydon

25%

10

Lambeth

46%

10

Lewisham

24%

11

Wandsworth

44%

11

Barnet

22%

12

Richmond upon Thames

43%

12

Greenwich

22%

13

Merton

43%

13

Harrow

22%

14

Lewisham

42%

14

Haringey

22%

15

Waltham Forest

41%

15

Hackney

20%

15

Brent

39%

15

Sutton

19%

17

Ealing

38%

17

Ealing

18%

18

Kingston upon Thames

35%

18

Hounslow

18%

19

Tower Hamlets

35%

19

Bromley

17%

20

Greenwich

34%

20

Brent

17%

21

Barnet

34%

21

Merton

16%

22

Bromley

32%

22

Kingston upon Thames

15%

23

Harrow

29%

23

Tower Hamlets

14%

24

Hounslow

28%

24

Southwark

13%

25

Sutton

27%

25

Lambeth

13%

26

Hillingdon

24%

26

Richmond upon Thames

10%

27

Enfield

24%

27

Westminster

9%

28

Bexley

23%

28

City of London

7%

29

Croydon

23%

29

Camden

7%

30

Newham

20%

30

Wandsworth

7%

31

Redbridge

17%

31

Hammersmith and Fulham

5%

32

Havering

15%

32

Islington

4%

33

Barking and Dagenham

15%

33

Kensington and Chelsea

3%

Source: ONS/ Land Registry, PwC Analysis

32

UK Economic Outlook July 2017

Table 3A.2: House price growth by commuter city, % change April 2016 – April 2017 Rank

Commuter City/Town

House Price Growth (April 2016-April 2017)

1

Dartford

13.1%

2

Watford

11.6%

3

Colchester

10.8%

4

Braintree

10.7%

5

Basildon

10.2%

6

Rochford

10.2%

7

Luton

10.1%

8

Harlow

9.5%

9

Ashford

8.8%

10

Slough

8.6%

11

Brentwood

8.5%

12

Wycombe

8.4%

13

Southend-on-Sea

8.1%

14

Canterbury

8.0%

15

Tunbridge Wells

7.7%

16

Brighton and Hove

6.9%

17

Stevenage

6.6%

18

Horsham

6.3%

19

Milton Keynes

5.8%

20

Chelmsford

5.6%

21

Sevenoaks

5.2%

22

St Albans

5.0%

23

Oxford

4.8%

24

London

4.7%

25

Winchester

4.3%

26

Guildford

3.7%

27

Crawley

3.0%

28

Woking

2.2%

29

Maidstone

2.0%

30

Reading

1.1%

31

Hastings

1.0%

32

Cambridge

1.0%

Source: ONS/ Land Registry, PwC Analysis

UK Economic Outlook July 2017

33

Technical annex: Modelling methodologies UK house price projections

Regional house price projections

Our analysis focuses on ONS and Land Registry house price indices. Data from the ONS vary from those provided by Nationwide and Halifax, though broad trends tend to be similar over time. We focus on the ONS data as they cover a larger sample size, given that Nationwide and Halifax base their indices on only their own mortgage approvals.

The regional house price projections relate to the main scenario only, but it should be borne in mind that uncertainties are even greater at the regional than the national level, so these projections can only be considered illustrative. Our regional projections are based on a regression between house price to earnings ratios and mortgage rates. The results are then adjusted so as to aggregate to the UK average estimates.

The PwC house price model consists of two parts: a long run equilibrium equation and a short run error correction model that indicates how house prices adjust back towards this equilibrium level. In the long run, real house prices are driven by three key variables: real annual earnings, the ratio of the housing stock to the population (‘supply’) and a variable which reflects general credit conditions. Monetary values are deflated into real (inflation adjusted) terms using CPI. In the short run, changes in real house prices are driven by: deviations from the long run equilibrium; changes in real annual earnings; changes in credit conditions; and the previous period’s mortgage interest rate (cost of borrowing). The coefficients for these model variables and other summary statistics for both models are shown in the tables below. The parameters of the model were estimated using the standard ordinary least squares (OLS) econometric technique based on annual data from 1975-2016.

Long run model (Cointegrating equation) R-squared = 0.93 Dependent variable: Real house prices

No. of observations=42 Coefficient

t-statistics

16.40

10.9

Supply

-1666.5

-4.7

Credit

13898.4

2.0

Constant

391948.7

3.6

Earnings

Short run model R-squared = 0.63 Dependent variable: Change in Real house prices

No. of observations=41 Coefficient

t-statistics

-0.11

-1.5

24431.1

4.6

7.4

3.7

L.Mortgage rate

-594.6

-2.3

Constant

6272.9

2.6

L. co-integrating equation residual D.Credit D.Earnings

Note: ‘D’ refers to the first difference of a variable (i.e. change on previous year). ‘L’ refers to the lagged value of a variable in the previous year.

34

UK Economic Outlook July 2017

www.pwc.co.uk/economics At PwC, our purpose is to build trust in society and solve important problems. PwC is a network of firms in 157 countries with more than 223,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at www.pwc.com/UK. This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. © 2017 PricewaterhouseCoopers LLP. All rights reserved. In this document, "PwC" refers to the UK member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. The Design Group 31955 (07/17)

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