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Economic Overview Christine Whitehead London School of Economics The Residential Funding Conference ICO Conference Centre London, July 5th, 2016 What to say after the Referendum? • No real chance of clear-cut assessment in current febrile atmosphere; • Basically about expectations and risks – neither of which are handled well by the housing market; • Whatever it is going to be a very messy few months – if not years; • The questions around negotiation, contagion and political events can only be guessed at; • And importantly world economy not yet fully recovered from 2008; • Housing directly affected by all these factors; • Given my remit the only real choice is to go back to basics. Pre-Brexit • World economy - IMF suggests 3 - 3.5% growth pa but with emphasise on downside risks and continued slow down across most continents; • European Union saw some increased growth in early 2016 but projections still under 2% pa and expected to be negatively affected by a leave vote; • UK economy – projection 2016: 1.8% - similar to Eurozone; 2017 2.0% -slightly higher than EU - but considerable uncertainty; • House price predictions – slower rises in 2016 and less in prime London – but rising thereafter quite rapidly associated with projected stable growth; • Output levels – 2014/15 net additions 170,000 in England up 34,000 from year before – so apparently on right trajectory; • London 24,000 in 2015/16 up (but only 20,000 starts); • Major concerns about capacity and land availability in parts of the country. Post- Referendum • Shock to world economy - no positive offsets in short run – but is it just another risk? • Immediate impact on EU almost as large as or even larger than for UK – concerns re populism and pressures towards breakup – reasons for making it difficult? • UK national economy – FTSE 100 reflecting global firms relatively strong ; FTSE 250 more reflection of overall market quite heavily – but down further in eg Ireland; • £ down against euro but much more importantly against US$ which affects all trade in US$ - and US also unpredictable; • So far therefore the main impact is: increased risk and potential for inflation – with potential for interest rate rises after initial falls; • Difficult not to predict some slowdown in investment and recruitment leading possibly to recession and some considerable decline in activity in the housing market. Structural issues in housing market • London very rapid price rises over last few years but some parts of the country still seeing falling prices – even before this event; • New supply side under pressure because of land availability/prices and shortages of skills/materials; • Before the vote already some signs of decline in activity; • Government objective of 1 m homes by 2020– partly new build, partly transfer from other uses; • But significant part of projected output dependant on government support; • Role of institutional investors in making new PRS work; • Some fairly significant planning reforms – but little else changed. More Fundament Issues (1) • Demand side: number of households; income; relative prices; cost and availability of credit; attitudes to risk; • Demographics - continued in-migration especially in London where population predicted to rise rapidly; young population, so continued demand for additional housing; • But income/risk effects may slow household formation – some pressure taken out of the market; • Prices will fall for international buyers – and some may think easier to access the UK – initial positive effect in central London but EU demand almost certainly down; • Any price falls may not result in increased demand from those in the UK because of credit market constraints and fears about the economy; • Unlikely that government can achieve shift to owner-occupation as proposed; • Distributional issues likely to worsen; • All of these (except some aspects of demographics) depend on the economy. More Fundamental Issues (2) • Supply depends on: expected prices; costs of production, including finance; land costs and availability; other markets; attitudes to risk; • Expected prices lower but prices of land already in the bank based on past expectations –difficult to realise losses; • Highest probability is that ‘here we go again’ – things were beginning to look up but likely that starts down; concerns especially in London about relationship between starts and completions – possibility of mothballing; • Large developers, like banks and indeed institutions, probably stronger than in 2008 BUT always easier to wait and see - and always takes time to start again. Government Policy • First objective must be macro-stabilisation, whatever the impact on the housing market; • The most important impacts probably on interest rates and credit constraints – both likely to have adverse effect on housing market; • Government policy not well aligned to supporting the market, given emphasis on starter homes and ownership and lack of grant; • Direct impact of tax changes on rental market and particularly on Buy to Let also not helpful at present time; • Potential for further welfare changes could worsen situation for HAs, landlords and tenants; • A case for a more positive approach - but is housing high enough up the list of concerns? Overall • Forecasting is a mug’s game; • Fundamentals may not be that changed in long run regulation will remain much the same; immigration unlikely to slow much if at all; international investors still want to diversify; UK still well placed in the world and no great benefit to EU to making the situation worse? • But world economy is not strong and EU’s signs of improvement likely to slow; UK’s already have as people take risk averse positions; • Potential for addressing some of the more fundamental issues in housing while pressure somewhat reduced – but much more likely that supply will fall; • This time its not just the economy but the politics that matter.