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Forget Brexit – here’s the real reason the UK housing market is fragile

28th August 2018

Insider advice from Mark Mugliston, Residential Sales Manager, in his monthly column in the Diss Express.

What’s ailing the UK property market?

House price growth across the country has slowed to just 2.2%, according to the most recent Nationwide release. That’s a drop in real (after-inflation) terms. Meanwhile, transaction levels are falling – mortgage approvals dropped to their lowest level in three years at the end of 2017.

Could it be possible that you can go wrong with bricks and mortar?

Brexit is the go-to excuse for many, much as unseasonal weather is the go-to excuse for troubled fashion retailers.

But the reality is that the problems in the UK housing market are a lot bigger than Brexit. London has definitely been the hardest hit part of the UK housing market.  At the high end, discounts on asking prices are at their highest levels since the financial crisis.

However, according to the most recent survey by the Royal Institution of Chartered Surveyors (RICS), activity is slowing across the country. You can put it down to Brexit or you can put it down to political uncertainty.  Both of those might be affecting the higher end of the market, but there’s a much more specific reason for house prices to be struggling, and it’s one that isn’t going to change any time soon. It’s the fact that one of the biggest and most powerful purchasing forces in the UK market of the past decade is being squeezed out of the market.

Between changes to buy-to-let taxation and higher levels of stamp duty, becoming a landlord is no longer seen as the sure route to riches it once was, and that is having a big impact on the UK property market. The additional rate of stamp duty on those buying second homes is one factor putting off would-be landlords. But more important is that the ability for higher-rate taxpayers to offset their mortgage interest payments against their tax bills is being withdrawn in stages. The squeeze began last year and it will be entirely withdrawn by April 2020.

The upshot is that it’ll be far harder for landlords to make the sums add up.

A house-price crash seems unlikely – but a boom seems even less likely.

The potential good news is that this leaves the field open to owner-occupiers. The tricky bit is getting from where we are now to a point where those first-time buyers can actually afford to buy the property.

What will happen to prices? As long as interest rates stay relatively low, then the idea of a huge crash still seems unlikely.  We’ve seen a small rise recently by the Bank of England and they could go up a bit higher from here and probably still not do too much damage.

But equally, there’s little reason to expect prices to rise. Whichever government runs the country for the next ten years or so, it’s clear that increasing housing supply is a major policy goal now. Interest rates can’t get much lower, so it’s hard to see how credit conditions can get any easier and physical property is going to remain a tempting target for taxation.

In market terms, most of the risk is to the downside.  Just to be clear, we’d heartily welcome lower house prices and a more sensible UK housing market. Let’s just hope the adjustment happens gently enough for our financial system to cope.