Housebuilder October 2018

Housing Market Intelligence Report
Continued from page 32
regarded as normal rates for a further three years or so.
Looking back, economic growth eased again in 2017,
if only slightly, from 1.8% to 1.7%. And the pattern
of low growth looks set to continue after a poor start
to 2018 when bad weather closed construction sites,
hindered transport and kept shoppers from shopping.
Activity in the retail and construction sectors both
took a hit in the first quarter which rose by just
0.2% according to the Office for National Statistics.
But better weather in the second quarter saw both
bouncing back and supporting a rise in GDP in the
quarter of 0.4%.
Based on this pallid start to the year it is not
surprising to see the average of the forecasts compiled
monthly by HM Treasury suggesting that annual GDP
growth is set to drop to 1.4% in 2018, with the newer
forecasts suggesting 1.3%.
The consensus for the next two years looks broadly as
weak, with growth in gross domestic product expected
to lift to just 1.7% by 2020. The graph shows how the
average over this period (yellow line) compares with
both the recent past (orange line showing average
growth 2013 to 2017) and the pre-recession period
(red line showing the average growth 2000 to 2007).
This illustrates just how much tougher the economic
prospects appear over the coming few years – leaving
aside the risk of any shocks.
The household savings
ratio has varied
considerably over the
past three years
From the perspective of housebuilders this tougher
environment will reveal itself in various ways, not least
in a continuation of poor growth in real earnings. The
forecasts compiled by HM Treasury point to growth in
average earnings of less than 3% a year up to 2020.
With forecasts for inflation (the CPI measure) over the
period running at above 2%, real earnings growth will
remain suppressed. Indeed, it is likely that many in
employment will see their real earnings fall.
Graph 10 shows how, even a decade on, average real
earnings are below their pre-recession level. This is
likely to still be the case in 2020.
With many households struggling to make ends
meet (the JAMs of modern political parlance) there is
more than a hint in the data to suggest that they are
dipping into their savings to supplement falling real
34 housebuilder october 2018
wages. The household
savings ratio has varied
considerably over the
past three years. As
110
recently as 2015 Q3, the
savings ratio was 10.0 105
but then steadily fell to
only 3.0 in 2017 and, 100
while it rose to 4.1 in
2018 Q1, it is still low by 95
historic standards.
On the flip side
90
unemployment is running
at very low levels and
85
the forecasts suggest
there is little reason to
suppose there will be a
surge in unemployment
over the next few years.
A sense of greater job security, albeit in jobs providing
little advancement in income, may be one reason
why households are prepared to dip deeper into their
reserves to sustain their living standards.
However, there is a further issue for the housing
sector to consider. The Bank of England appears keen
on raising what are historically low interest rates to
more normal levels and they have hinted at likely rate
rises for the second half of 2018 and again in 2019.
These may be small rises, but any rise would normally
be expected to cool the housing market.
Against this rather grey and downbeat economic
background, there is the wild unknown that is-Brexit.
This will most likely have various direct impacts on
housebuilding, and it may well already be doing so
on the labour side, even though we currently remain
within the EU.
More broadly, though, from a wider economic
perspective, the continued Brexit uncertainty and
indeed the apparent growing risk of “crashing out
without a deal” is likely to increase nervousness
among investors. This does not help economic growth
or house buying.
Jul 08
Jul 10
housing market
Looking more closely at the housing market, there are
somewhat mixed messages. House prices in London and
in the north east fell over the 12 months to June 2018,
according to ONS. But otherwise prices are still rising
across Britain. However, house price inflation eased across
all the regions of England except the West Midlands,
which along with Wales and Scotland has seen solid
increases in house prices in the 12 months to June 2018.
Not surprisingly the big unknown for housebuilders
Graph 10. Nominal and real earnings growth
Jul 12
Jul 14
Graph 10: Nominal and real earnings growth Sources: ONS
Jul 16
Real
Nominal
Jul 18
and the housing market more generally is the
unknown impact of leaving the EU when terms are
finally agreed. Again, it is hard to judge how things
will play out with so little clarity, but the consensus is
very much that the balance of risks is on the downside
in the medium term.
This suggests nervousness is likely to already be
infecting the views of investors, and possibly, albeit
to a lesser extent, unsettling the more mainstream
home buyers. Certainly, this fits with the picture we
are seeing in house prices, with the London market
becoming the most fragile regional market and now
seeing prices fall.
As to the expectations for future house prices, the
median of those collated by HM Treasury in August
points to a 2.6% rise in 2018 and 2.8% in 2019. This
suggests average rises across the country of a shade
above the wider inflation in the economy. There was,
not surprisingly, a range of expectations, from 0.7% to
4.0% for 2018 and 0.2% to 4.0% in 2019. Also, there
will be wide variations across the regions and within
and between individual housing markets.
Looking however beyond the short-term and the
medium-term influences on the housing market, there
is a notable long-term challenge. There is a long-term
decline in residential transactions. In the late 1980s more
than 2 million homes were bought across the UK annually.
The housing crash, a decade ago, saw the number fall to
below 1 million. The number bounced back to 1.2 million
in 2014. But sales of all homes have remained stubbornly
around this level for the past four years.
This constrained level of liquidity in the wider housing
market in normal circumstances would drag heavily
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