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How will the election affect house prices in the UK?

It's probably an understatement to say that the past twelve months have been among the most dramatic in living memory, both in the United Kingdom and abroad. There was, of course, the largely unexpected outcome of the historic referendum on the country's membership of the European Union and the domestic political fallout, including the resignation of Prime Minister David Cameron. Then there was the American election which attracted unprecedented media coverage and the result of which remains somewhat contentious, even months after the event. Then there are questions around the future of the UK, with at least one member country, Scotland, apparently considering a fresh vote on independence. Now, the new Prime Minister Theresa May has called a snap general election to be held in early June. History tells us that these kinds of events can have dramatic impacts on the economy generally and on the housing market specifically. So, how do experts think the upcoming election will affect house prices in the UK?

Precedent

There's been a recurring theme in the months leading up to the past nine general elections, namely that house price growth has, in various degrees, faltered in the quarter before the vote. As Alison Platt of Countrywide commented when asked about the forthcoming poll, there is a "clear correlation" between elections and the volume of property transactions. House prices have, in turn, risen much more quickly than expected in the immediate aftermath of the election. In broad terms, then, it seems that it is the uncertainty, rather than the fear of a particular party gaining or retaining power, which causes the pre-election slump, although some political commentators might take a different view.

June 8, 2017

So, can we expect the same pattern to emerge in the coming weeks? Well, not entirely. According to the housing economists, this election may prove anomalous, in terms of the trajectory of the property market, for several reasons.

1. Market is unpredictable

The sector is proving fairly difficult to predict right now. The crash that some analysts expected to ensue from the Brexit vote hasn't​ really materialised and prices have in fact proven remarkably resilient. Certainly, there has been a marked decline in the central London prime or luxury end of the market, but the capital has more exposure to the EU than other major British cities and there are other factors weighing more heavily on the traditionally exclusive neighbourhoods like Kensington and Chelsea - the new tax regime for investment properties being the most prominent. In contrast, locations in the Midlands, East, South West and North West of England are recording sustained house price growth. Manchester, for instance, reported 8.8 per cent growth year-on-year in February, and the volume of sales in the city has increased by an astonishing 40 per cent in the past three years. Numerous causes for this have been posited, but the most likely explanation is the city's centrality to the Government's Northern Powerhouse Project and the booming local economy.

2. Atypical election

There isn't the typical lead time on this election, so there won't really be much time for the market to react. Likewise, while the result of the poll is by no means certain, very few commentators are seriously expecting a change of governing party, so there isn't the customary uncertainty during the weeks of campaigning. On June 9, moreover, the sector will have the certainty of knowing that, all things being equal, we are five years away from the next election. To this extent, June's vote won't necessarily affect the cost of housing to any significant degree.

3. Bank of England base rate and housing shortage

The Bank of England base lending rate is 0.25 per cent and there are no signs that this will be adjusted upwards anytime soon. This means that mortgages are generally more affordable and helping to support the market. Similarly, the country is in the midst of a well-documented housing crisis, with demand for houses and flats outstripping supply. While there are numerous ambitious central government plans afoot to increase the country's housing stock, this is a long term project and, in the short term, the shortage of homes will act as a parachute, preventing prices from falling too far before and after the election.

4. Mortgage wars

Despite suggestions covered in these pages earlier this year that the days of ultra low mortgage rates might be numbered, intense competition among mortgage lenders seems poised to unleash a rates "war." In a recent Nethouseprices column, we looked at Atom Bank, which in March launched the cheapest ever mortgage, at just 1.29 per cent for certain deals. This offer was admittedly withdrawn rather abruptly after a few days, but there are clear indications that other banks are following suit and that a mortgage rates war might be the upshot. See, for example: http://www.bbc.co.uk/news/business-39665533. Economists believe that the net result of lenders slashing their rates will be an uptick in both the volume of house sales and in prices, negating the impact of the election.

However...

As discussed in previous features, there is a widespread expectation among the housing gurus that pressures on the wider British economy will, during the balance of this year, slightly subdue demand for housing. General price inflation, a weakening jobs market and near record consumer debt are being forecast. This tends to suggest that, while a house price crash is emphatically not on the agenda, prices are unlikely to grow at such a rapid a pace as we have seen in the past few years. Taking an average of the predictions for growth in 2017, it seems that growth will be limited to around two or three per cent, irrespective of the general election.

As ever, the team here at Nethouseprices will be monitoring the news for developments affecting house prices in the UK in the coming weeks and months. Visit us again soon for updates, commentary and analysis of the property market and the issues that matter to you, your family and your business.
 

Source: Nethouseprices

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