Download Economic Overview Christine Whitehead London School of

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.