UK HOUSING MARKET PROSPECTS

WINTER 2015

RESEARCH

Theme: Modernist housing in the UKFront cover: Golden Lane Estate, LondonThis page: Balfron Tower, London

UK HOUSING MARKET PROSPECTS

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• House prices to finish the year having grown by 4.5% in 2015 with 4.4% growth predicted for 2016 supported by an improving economic backdrop. This assumes a slow rise in base rates next year, however, it is also likely that the brakes are applied to the housing market earlier in the form of mortgage finance constraints

• Our alternative forecast scenario, with the current base rate held stable well into 2017, would fan the housing market pushing price growth to nearly 7% in 2016. This scenario would deliver a credit boom with parallels to the early 2000s and would likely force the Bank of England to seek more substantive mortgage finance restrictions.

• Regional house price disparities are growing with the North East and Scotland showing the greatest weakness, while London stabilises, however, these regional figures do mask a range of growth outcomes at a micro location level in most cities.

• THE HEADLINES

CONTACTS

Simon Durkin Head of Research simon.durkin@bnpparibas.com 020 7338 4020

Adrian Owen Head of Residential adrian.owen@bnpparibas.com 020 7338 4064

Sam Blake London & Business Line Research Lead samuel.blake@bnpparibas.com 020 7338 4130

Tim Cann Central Southern, South Coast & South West tim.cann@bnpparibas.com 011 7984 8405

Steven Cooper Central London steven.cooper@bnpparibas.com 020 7338 4045

David Couch North and Midlands david.couch@bnpparibas.com 011 4263 9221

Julian Gaynor South East of England julian.gaynor@bnpparibas.com 020 7338 4162

Nadir Khan-Juhoor Scotland nadir.khan-juhoor@bnpparibas.com 013 1260 1118

RESEARCH

RESIDENTIAL

BNP Paribas Real Estate 5 Aldermanbury Square London EC2V 7BP Tel.: 020 7338 4000

Dunboyne Road Estate, London, NW3

Park Hill, Sheffield

The UK economy has continued to demonstrate sustained expansion, although the provisional GDP estimates for Q3 suggest growth tempered over the last quarter to around 0.5%. Construction and manufacturing output showed a marked slowdown. Manufacturing is struggling to sustain activity against global economic headwinds and the associated strength of Sterling, despite the upside of lower commodity prices. However, concerns should not be overstated; China’s economy is slowing rather than contracting, meanwhile the Euro-zone is showing signs of more robust growth.

FIGURE 1: ECONOMIC FORECASTS

• ECONOMIC BACKDROP

1 Expenditure estimate at factor cost2 U.K. Wholly unemployed excluding school leavers (new basis)3 Sterling effective exchange rate, Bank of England Index (2005 = 100)

The subdued global picture places greater onus on domestic demand to shoulder responsibility for the UK economy for a little while longer. Positively, improved business confidence and productivity levels are translating into a strengthening labour market. The UK unemployment rate fell to 5.3% in Q3, the lowest level since Q2 2008, while the number in work stands 419,000 ahead of the same point last year. The pace of job creation is likely to slow, but improving productivity will have a further positive impact on earnings. With the benefit of minimal or flat inflation over the coming quarters, real average earning growth seen over the last year is expected to persist.

FIGURE 2: RISING REAL EARNINGS

2012 2013 2014 2015 2016 2017 2018GDP GROWTH1 0.7 1.7 2.8 3.0 2.6 2.4 2.4INFLATION

CPI 2.1 1.9 1.6 0.1 1.0 1.0 2.0RPIX 3.2 3.1 2.4 1.3 1.9 1.9 2.7

UNEMPLOYMENT (MILLIONS)ANNUAL AV2 1.6 1.4 1.0 0.8 0.7 0.7 0.64TH QTR 1.6 1.3 0.9 0.7 0.7 0.7 0.6

EXCHANGE RATE3 83.0 81.6 87.1 91.1 91.9 92.5 92.23 MONTH INTEREST RATE 0.9 0.6 0.6 0.6 1.0 1.6 2.15 YEAR INTEREST RATE 0.9 1.3 1.8 1.8 2.2 2.5 2.5CURRENT BALANCE (£BN) -53.2 -65.9 -84.2 -77.8 -78.2 -78.8 -79.5PSBR (£BN) 110.6 95.2 88.6 83.6 78.7 57.6 38.5

Source: ONS (historic); Liverpool Macroeconomic Research (forecast)

Source: ONS

Note: Average Earnings – 3 month average y/y % change

Trellick Tower, London, W10

UK HOUSING MARKET PROSPECTSUK HOUSING MARKET PROSPECTS

Further improved household finances and confidence over the next 12 months will inevitably create excessive and unwelcome pressure on the market. We expect prices to have risen by 4.5% in 2015 and to rise by 4.4% in 2016. Over the next five years, to the end of the decade, we expect the average house price to grow by close to 7% per annum, reflecting a period of ‘catch-up’ as real prices return to the trajectory of their long term trend.

FIGURE 3: REAL UK HOUSE PRICE GROWTH AND FORECAST

• HOUSE PRICE FORECASTS

6.7% 11.5%

The forecast absorbs the impact of the Chancellor’s Autumn Statement announcement of the introduction of a 3% additional SDLT for purchases of additional residential properties, such as buy-to-let properties and second homes, excluding corporate investment purchases.

Overall we do not believe the additional tax, which will take effect 1 April 2016, will impact on average UK house price growth, but will be felt in town centre sub markets and Central London and this will be reflected in price growth in these markets in 2016. In large part this will be driven by the fortunes of the new build market with its high proportion of investment and second home purchases. The SDLT levy comes on top of the phased changes to tax relief announced in the July budget.

price rise in 2017price rise in 2017

4.4% 6.9%price rise in 2016 price rise in 2016

CENTRAL SCENARIO: BASE RATES RISE LATE 2016

ALTERNATE SCENARIO: BASE RATES HELD AT 0.5% INTO 2017

Source: BNP Paribas Real Estate; Nationwide

Note: Real prices presented on logarithmic scale to illustrate the pace of price change

In theory this creates a positive backdrop for the housing market. However, consumer confidence has been damaged by global economic news and associated stock market movements. While consumer spending remains strong, household confidence to make significant purchases has slipped. Furthermore, ‘macro-prudential’ controls exerted on the housing market in the form of mortgage lending restrictions also served to contain activity over the last quarter. Prices rose 1% during Q3 (Nationwide) in line with that seen in Q2, but marginally down on our expectations.

However, wobbles in household confidence aside, it remains the case that growing real earnings combined with the exceptionally low cost of finance is mitigating the impact of rising prices, bolstering the housing market. October saw a slight acceleration in growth to 0.6%, up from 0.5% in September, placing prices 3.9% ahead of the same point last year (Nationwide). The mortgage market also points to strong underlying demand. The value of gross lending in September stood at its highest level since 2008, while lending for home purchases in Q3 was 18% higher than in Q2. Activity by first time buyers was particularly strong, with this group also benefiting from improved finance rates on higher LTV loans (CML).

While the fundamentals for demand look set to strengthen further, particularly in light of Bank of England comments on a deferred base rate rise to 2017 (although the BNP Paribas House View is still mid 2016), the supply picture remains a serious concern. The RICS continues to report a growth in homebuyer enquiries while the supply of homes for sale remains depleted. The increased Stamp Duty rate at the upper end of the market has impacted upon the supply of property further down the chain. Meanwhile, housebuilders are taking a more cautious approach in the face of new housing policy measures, reflected, in part, in the sector’s contribution to GDP over the last two quarters. The ability of the new starter home policy to deliver significant numbers in the right places is also unclear just yet.

• THE HOUSING MARKET IN Q3

Total price growth Average annualised price growth

2016-19 forecast 2016-19 forecast

27% 7%

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Brunswick Centre, London, WC1

FORECAST

LONG TERM TREND

• FUTURE PRICE GROWTHThe disparity in prices across the regions of the UK continues to accentuate, with the North East, Scotland, Wales and Northern Ireland showing less ongoing pressure of demand on the available supply. However, in other regions such as the Midlands, North West and the non-London south we expect to play a degree of catch-up with London where, following its outperformance for so many years, prices are forecast to grow slightly below the national average.

There will be local markets where the impact of the 3% SDLT increase will be more acutely felt. Central London and city centres such as Manchester and Leeds, where there is a high proportion of new build stock bought for investment or second homes purchases, will exhibit high levels of activity before the April deadline and then most likely a more subdued outlook.

Given the relative small scale of this segment of the market in the London context in particular, the impact will be relatively slight on forecasts for London overall, with a 1% shortfall in growth otherwise expected. Once the tax changes are bedded in, markets will trend toward previously forecast trajectories, albeit with some uncertainty surrounding the longer term role and fortunes of the prime central London market.

This forecast assumes that the current base rate start its slow upward movement in mid to late 2016. However, given the Governor’s suggestion that the base rate will possibly remain at 0.5% until 2017, we have undertaken an alternate forecast scenario. Under this assumption we would expect to see a sharp increase in GDP and inflation, while effectively delivering a credit boom not unlike the early 2000s. Under this scenario house prices would rise by almost 7% in 2016 and by over 11% in 2017.

This scenario is a cautionary tale for the market. Certainly, there is already concern at the Bank of England over the pace of house price growth. Clearly housing supply, or the relative lack of it, is a significant driver, however, the sustained low cost of finance is also a major contributor. Even under our central scenario it is likely that the Bank will seek to place a brake on house price growth, by means of further restrictions on the availability of finance. This may achieve the desired dampening effect, although does not address the underlying structural issue in the market of insufficient supply, although 3% levy on SDLT for additional properties will release supply in some submarkets.

Barbican Estate, London, EC2

Keeling House, London, E2

www.realestate.bnpparibas.com7

UK HOUSING MARKET PROSPECTS

NorthernIreland

Scotland

NorthEast

North West

Yorkshire &Humberside

East Midlands

West Midlands

Wales

South West

Outer South East

East Anglia

London

40.2% 36.1%

25.5%

25.1%22.0%

31.2%29.6%

13.2% 23.7%

22.2%

15.7%

16.7%

10-19%

20-29%

30-39%

40-45%

Source: BNP Paribas Real Estate

• COMPOUND PRICE GROWTH, 2016-2019

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ABU DHABIAl Bateen Area Plot n° 144, W-11 New Al Bateen Municipality Street n° 32 P.O. Box 2742 Abu Dhabi Tel.: +971 44 248 277 Fax: +971 44 257 817

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FRANCE Headquarters 167, Quai de la Bataille de Stalingrad 92867 Issy-les-Moulineaux Tel.: +33 1 55 65 20 04 Fax: +33 1 55 65 20 00

BELGIUMBoulevard Louis Schmidtlaan 2 B3 1040 Brussels Tel.: +32 2 290 59 59 Fax: +32 2 290 59 69

CZECH REPUBLICPobřežní 3 186 00 Prague 8 Tel.: +420 224 835 000 Fax: +420 222 323 723

GERMANYGoetheplatz 4 60311 Frankfurt Tel.: +49 69 2 98 99 0 Fax: +49 69 2 92 91 4

HONG KONG25 /F Three Exchange Square, 8 Connaught Place, Central, Hong Kong Tel.: +852 2909 2806 Fax: +852 2865 2523

HUNGARY Alkotás u. 53. H-1123 Budapest, Tel.: +36 1 487 5501 Fax: +36 1 487 5542

IRELAND20 Merrion Road, Dublin 4 Tel.: +353 1 66 11 233 Fax: +353 1 67 89 981

ITALYVia Carlo Bo, 11 20143 Milan Tel.: +39 02 58 33 141 Fax: +39 02 3706 9209

JERSEY 3 Floor, Dialogue House 2 - 6 Anley Street St Helier, Jersey JE4 8RD Tel.: +44 (0)1 534 629 001 Fax: +44 (0)1 534 629 011

LUXEMBOURGAxento Building Avenue J.F. Kennedy 44 1855 Luxembourg Tel.: +352 34 94 84 Fax: +352 34 94 73 Investment Management Tel.: +352 26 26 06 06 Fax: +352 26 26 06 26

NETHERLANDS Antonio Vivaldistraat 54 1083 HP Amsterdam Tel.: +31 20 305 97 20

POLAND Al. Jana Pawła II 25 00-854 Warsaw Tel.: +48 22 653 44 00 Fax: +48 22 653 44 01

ROMANIAUnion International Center 11 Ion Campineanu Street 6th floor, 1st district Bucharest 010031 Tel.: +40 21 312 7000 Fax: +40 21 312 7001

SPAINC/ Génova 17 28004 Madrid Tel.: +34 91 454 96 00 Fax: +34 91 454 97 65

U.A.EABOU DHABIAl Bateen Area Plot n° 144, W-11 New Al Bateen Municipality Street n° 32 P.O. Box 2742 Abu Dhabi Tel.: +971 44 248 277 Fax: +971 44 257 817

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AUSTRIA

CYPRUS

ESTONIA

FINLAND

GREECE

HUNGARY ***

IVORY COAST *

LATVIA

LITHUANIA

MOROCCO

NORTHERN IRELAND

NORWAY

RUSSIA

SERBIA

SLOVAKIA **

SWEDEN

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PLEASE CONTACT

Research SImon Durkin Tel.: +44 20 7338 4020 simon.durkin@bnpparibas.com

Front cover image source Ref DP100590 © English Heritage / James O. Davies