Below is a summary of a spring 2017 talk given by Simon Rubinsohn, chief economist at the Royal Institute of Chartered Surveyors (RICS) – largely based on his insights using the high profile market surveys regularly conducted by the organisation as well as other reputable data sources. Rubinsohn is closely involved with policy development and regularly works with the Bank of England, International Monetary Fund (IMF) and the World Economic Forum on issues related to property sector as well as being on the board of housing provider L&Q.
Simon split his talk into two parts: the macro-economic picture and a more specific exploration of the housing sector.
The Macro-Economic Picture
- Commenting that many economists have had to admit a gross overestimation of the impact of Brexit, Rubinsohn started by referring to the Citi UK Economic Surprise Index demonstrating that the preponderance of data flow has shown that the economy has been extraordinarily resilient since June 23rd 2016. Although Oxford Economics UK data reflects a general consensus that there is likely to be a slowdown in the coming years, any risk of recession currently seems unlikely;
- However, cited concerns moving forward include a squeeze in the growth of (real) household income as a result of higher inflation and a slowdown on consumer spending (the gap between wage growth and inflation continues to narrow). Additionally, uncertainty about the future relationship with the EU is meaning that businesses are committing less investment spending than would otherwise have been the case. The most recent Bank of England Investment Survey of the manufacturing and services sectors reflected this sentiment;
- Rubinsohn outlined the possibility of households increasing borrowing to offset the “temporary” squeeze on incomes (in spite of any potential negative consequences) and the fact that exporters continue to benefit from a more competitive Sterling value. Global growth has surprisingly also been on the upside which could filter through to the UK economy. Furthermore, although the government remains committed to relatively tight fiscal policy, it has loosened the purse strings somewhat which should theoretically free up more money for housing and infrastructure;
- Overall, therefore, Rubinsohn believed that the macro environment is relatively supportive of housing development;
- In terms of the bank base rates, making accurate predictions is challenging. However, despite the inflationary pressures, using Bank of England money market data, Rubinsohn believed that it would currently appear doubtful for there to even be a quarter point hike in interest rates until well into 2018 (expectations have actually lowered since the start of 2017). However, the picture could change as a result of the aftermath of triggering Article 50; the rise of global protectionism and the impact on trade amongst other factors.
The Housing Picture
- The key issue remains one of supply – the RICS average (of existing) stock per surveyor, established in 1978, has decreased considerably in the last few years. Prior to that, Rubinsohn noted that the observable patterns were generally more stable. This phenomenon was attributed to the notable fall in net supply of new housing post-Global Financial Crisis (GFC) in parallel with both domestic and migratory population growth. Whilst delivery volumes started to pick up again from 2013, there is a significant backlog and therefore the elevated prices trends will remain. The fact that buy-to-let and overseas investors do not tend to recycle stock in the same way as owner occupiers do is also having a contributory effect on price inflation;
- The RICS survey of members shows that a large proportion of professional surveyors estimate sustained price growth in the North West, Northern Ireland and the West Midlands;
- The data is also telling a different story in prime Central London however: Kensington & Chelsea, Hammersmith & Fulham and Islington (property with sales values of between £1,000-£1,200 per ft²) have all seen price drops, despite a weaker Sterling boosting overseas investment interest. Conversely, areas such as Haringey, Dagenham and Redbridge (where property is priced between £600 and £700+ per ft²) were quoted as demonstrating healthy levels of growth. Nonetheless, a lack of affordability across London remains a major cause for concern (the house price to earnings ratio is currently double its long-run average);
- Referring to RICS New Buy or Enquiries and other mortgage approval data, Rubinsohn indicated that transaction activity looks likely to flatline for the foreseeable future (the most recent statistics pointed to 1.2 million annual property transactions, compared to 1.7 million prior to the global financial crisis);
- As mentioned in the May 2017 Property Investor´s Factfile, Council of Mortgage Lenders (CML) data pointed out that first-time buyer numbers are growing relative to homemovers (attributed somewhat to the “bank of mum and dad” helping with deposits). Rubinsohn also commented buy-to-let purchases continue to slide since the introduction of the stamp duty surcharge in April 2016 and growth in the sector is likely to remain subdued;
- RICS research has also pointed to headline rents in England increasing by 2% over the next year. Referring to RICS London Expectations and ONS London Rental Index, there may be a little more “pushback” in the Capital due to the ongoing affordability constraints;
- Although the Housing White Paper rhetoric may have been marginally scuppered by the Snap Election announcement and imminent Brexit negotiations, Rubinsohn commended the government for recognising that major housebuilders are not the only answer to the housing crisis (exemplified by a renewed focus on all tenures that will involve a broader range of developers such as Registered Providers and SMEs);
- Planning remains a key challenge moving forward. Questions were also raised regarding the implications of reduced labour supply as a result of Brexit and whether offsite construction will resolve this key issue facing the industry.