Politics has had a much greater impact than economics on the UK housing market over the past three-and-a-half years. Fuelled by uncertainty, modest price falls first witnessed in London have progressively spread across the capital’s hinterland. So, despite low levels of unemployment, relatively robust wage growth and mortgage interest rates at around 2.0%, annual house price growth stood at just 0.8% across the UK at the end of November.

With the outcome of the general election providing a pathway to #getbrexitdone, we expect price growth gradually to return, as households feel more secure about their finances. That said, given the complexities that remain in securing a trade deal with the EU, a Brexit bounce is likely to be short-lived, with investors having to wait until 2021 to see capital appreciation gain a foothold in the UK housing market.

As the economy improves, the chances of a gradual rise in interest rates will increase. That caps the scale of potential price growth in the mainstream housing market, even as political uncertainty clears. Economics, primarily in the form of affordability, will also dictate the pattern of mainstream price growth over the next five years, favouring the North of England over London and the South.

The future role of politics

Politics will continue to play a major role in the housing market if the Conservatives’ policies are taken at face value. Though the threat of rent regulation has receded, tenants will benefit from increased security of tenure via the abolition of no-fault evictions. Ultimately, investors will have the liquidity of their investment protected though the right to recover possession on sale, but this will leave them with less management flexibility and put a greater focus on ensuring future tenants provide good covenant.

In a manifesto heavily weighted towards encouraging home ownership, the plan to introduce lifetime fixed-rate mortgages at a 95% loan-to-value ratio aims to ‘slash the cost of deposits’. If successful, that could substantially impinge on tenant demand. But that is a very big ‘if’. Much depends on the appetite from lenders, and how the Bank of England deems such mortgages should be treated from a regulatory perspective. This will determine whether they are truly a viable option for first-time buyers, who otherwise seek sanctuary in the private rented sector.

The role of Help to Buy in supporting first-time buyer numbers is far more secure, and will continue until the scheme closes in 2023. With a heavy reliance on the private sector to meet a restated target of delivering 300,000 homes a year by the mid-2020s, and at least a million more over the life of the next parliament, continued support seems likely.

Achieving housing targets

That continued support is likely to come with strings attached. A focus on the design quality and environmental credentials of new housing will add to development costs, while a proposal for delivery of discounted homes for first-time buyers is likely to be implemented as a condition of planning. These proposals sit against the backdrop of a wider debate around land value capture and increasing the diversity and environmental credentials of the homes being built.

This is likely to cap the development gains enjoyed by landowners, even if the planning environment has become more conducive to unlocking development opportunities.

WHERE NEXT FOR STAMP DUTY?

Over the past five years, we have become accustomed to taxation being used as a tool to meet the government’s housing aims. From a stamp duty perspective, George Osborne’s overhaul in December 2014 has been followed by a 3% surcharge for buyers of additional homes and a relief for first-time buyers. During that time, the annual sums raised by stamp duty on residential property have increased by £600m to £8.2bn per annum.

The Tory Party manifesto included proposals for a further 3% surcharge for non-resident buyers, a figure at the top end of the range put forward by Theresa May in 2018. That is likely to temper the exuberance of overseas investors looking at UK residential property, making them more price sensitive. More importantly, it suggests that stamp duty cuts for the wider market have been put on the back burner.

_{Read the articles within UK Cross Sector Outlook below.}