The housing market and the implications of a hung parliament
Yolande Barnes, head of Savills Residential Research comments as follows:
It now seems clear that the market will be faced with the ramifications of a hung parliament. It is to be hoped that a workable government will be formed quickly to pave the way for an emergency budget and much needed clarity.
The last time we had this type of hung parliament was in February 1974, another time of economic decline following the bursting of the Barbour boom bubble. Then too, the economy was weak and the housing market had been in decline. House price growth remained negative in real terms throughout that year and beyond. Are the implications for housing similar this time around?
The key difference is that the mid 70s was a time of high inflation and high interest rates. Without doubt, the current historically low interest rates – which we forecast continuing for some time – are providing a very real cushion for the housing markets, mainstream in particular. Having said this, the fundamentals of short-term demand and supply have recently shifted sufficiently to raise the possibility of another market hiatus
Housing delivery will be an inevitable victim
It will be a while before we know whether there will be a minority government or some kind of Lib-Lab pact so it still remains unclear who will actually govern the country. Whatever the case, it is highly unlikely that any significant change will occur in policies relating directly to housing, such as changes in planning legislation, for example. Housing is simply not a high enough political priority for any party to justify the sort of struggle that will be involved to get reforming policies carried when the balance of power within the house of commons is so fragile. We consider it unlikely that any power-deal will be brokered on the housing delivery targets, for example.
The principal impact of the hung parliament therefore will be on the economy, markets and sentiment. We now expect political, and consequent economic, uncertainty to continue over the summer and possibly until a further election is called.
Mainstream turnover expected to stall
In the housing market – particularly the mainstream sector - we have recently seen a slowdown both in turnover and price recovery, and we would now expect this loss of momentum to continue. This will almost certainly provide an excuse for potential house purchasers to continue 'sitting tight' and not transacting. Turnover in many markets is likely to remain very low and, set against the increase in available stock now being seen in most markets, will suppress any price growth and will result in small price falls in some markets.
The most important issues now facing the housing market relate to more general taxation and spending which must remain the priority for any type of government in the light of the deficit position. The big question that the markets are asking is how quickly this will be tackled and where additional tax and spending cuts will now fall.
The implications for prime
The question of taxation has particular implications for the prime housing markets which, being driven by capital rather than borrowing, have seen resilience and growth over the past year. Recent policies such as 50% income tax at higher earnings levels, the bonus levy and higher stamp duty on properties over £1m have combined to dampen what would otherwise be very strong demand for prime property, particularly in London, this year. The threat of further tax rises, and particularly the possibility of a Lib-Lab pact allowing the Liberal Democrat proposed Mansion Tax to become a reality, would make prime property a less attractive proposition to high net worth individuals. Until such policies are settled, we would expect to see more buyers and sellers sitting on their hands, driving turnover down still further, particularly in sectors dominated by domestic owner-occupiers.
We would be less concerned about the prime markets, particularly in London and the South East, where turnover is expected to be more the victim than value. The positive news for prime markets, particularly in London and the South East, is that the currency markets have reacted to the result with falls in sterling. This will make UK property look cheaper to foreign nationals and could further incentivise the large and growing number of overseas purchasers, particularly from Asia and dollar-denominated currencies. Their buying power has already extended to the lower tiers of prime London, particularly new developments which are once again being bought for investment, and this renewed activity would be expected to continue.
Overall then, we think that the main impact on housing will be further, and continued, low transaction numbers and the increased possibility of further price falls particularly in the mainstream markets. Where and in which sector these fall will be determined by the type of government that is formed and consequently what type of economic policies will ensue in the next budget; on which sectors will tax rises impact and how will public sector spending cuts be made? This will take time to determine and the housing market hiatus will continue until there is more certainty.