UK housing prices may benefit from a Labour win
Housing market activity is expected to recover, following BOE rate cuts and an election victory for the Labour party
THE Labour Party’s expected handsome victory in the UK general election on Thursday (Jul 4) may usher in more than just a welcome return to political stability. It could also help foster economic growth, if its first hundred days prove to be as successful as it promises.
Removing uncertainty should restore confidence to a declining housing market which has been treading water. Political predictability is important for those deciding on moving home, which is the largest personal financial decision that most households make.
The critical catalyst would be if the Bank of England (BOE) sprinkles in some interest rate cuts.
Housing affordability, as measured by house prices to earnings, have returned to pre-pandemic levels, helped by strong wage growth and lower inflation.
Earnings are rising at three times the 2 per cent rate of inflation, and gross domestic product growth of 0.7 per cent in the first quarter has completely reversed the shallow technical recession in the second half of 2023.
The GDP growth rate could exceed 1 per cent by the end of this year, said Bloomberg Economics. Modest stuff, but economic conditions are broadly improving now that inflation has dropped back to its 2 per cent target, from its peak of more than 11 per cent.
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Nationwide Building Society chief economist Robert Gardner noted that consumer confidence has also improved substantially in the past two years.
Gardner pointed to household balance sheets, measured by overall debt to income, being in the best relative shape for two decades. The nationwide’s gauge of annual housing price growth rose by 1.5 per cent in June, up from 1.3 per cent in May.
The UK mortgage market looks primed to offer more competitive lending with several major lenders already trimming their headline deals. They are keen to lend at relatively high interest rates to maintain their market share.
Mortgage approvals are also at their highest in 18 months. Lenders often hedge exposure with benchmark interest rate swap rates, and they have been edging lower this month.
Bloomberg Intelligence real estate analyst Iwona Hovenko observed that UK house prices have remained on a steady – if modest – upward trajectory in 2024. She sees substantial room for improvement on mortgage pricing.
The lowest widely available loans, which are based on 75 per cent of the purchase price, are around 4.75 per cent for an initial two-year fixed term, and 4.4 per cent for a five-year fix.
However, these are still 50 basis points higher than were available earlier this year.
Back in January, the BOE was expected to cut rates several times in 2024. That has not transpired due to the central bank’s concerns over stickier services sector inflation.
Futures market expectations are still for at least one 25 basis point rate cut, possibly as early as the BOE’s next meeting on Aug 1, and maybe another before the end of the year.
The weather has been appalling for most of this year, dampening enthusiasm to trudge around prospective new homes. A summer rate cut would likely revive competition in the mortgage market, which might spur a boost to activity.
The Royal Institution of Chartered Surveyors’ (RICS) index of new buyer demand was the lowest in May in six months. Agreed sales have also fallen back as, understandably, activity is lower in the lead-up to the election, and with mortgage costs generally higher.
However, it is notable that for rental properties, the RICS survey shows tenant demand is still increasing along with stagnant supply – that is a recipe for higher prices.
The Labour party promises a sea change to how housing planning permissions are granted. There will be some low-hanging fruit, but in reality it will take considerable time to meaningfully alter the balance of overwhelming demand to woefully insufficient supply.
Creating fairer access to the aspiration of owning your own home is a fine political goal, but scything through the impenetrable National Planning Policy Framework, which binds the UK housing market like Japanese knotweed, will require huge effort.
It may take longer than a five-year parliament before house-building scales up to match population growth demand.
However, the Labour party will be offering mortgage guarantees for first-time buyers. The experience from similar efforts by Conservative governments suggests such subsidies only push up prices at the lower end.
It will not be all peaches and cream under Labour, as plans to insist all new developments offer 40 per cent lower-priced “affordable homes” do not sit well with property developers, who would struggle to make an overall return on projects.
High-value homes, as well as second residences, face tougher headwinds. Raising local property taxes on such dwellings appears a target-rich environment.
The party’s plans to reduce tax breaks for non-domiciled foreign residents and ending preferential tax rates on so-called “carried interest” earnings for private equity and hedge funds could lead to an exodus.
There are increasing reports of millionaires “voting with their feet” by heading to more tax-friendly environments.
Still, with a break not just in the actual weather, but also political and economic conditions, the necessary ingredients are falling into place.
Buyers are canny enough to bide their time to see how a new government’s plans bed in. If interest rates do start heading lower by the end of the summer, then housing market activity – and probably prices along with it – should be set fair. BLOOMBERG
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