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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
• 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
• 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.
• World economy - IMF suggests 3 - 3.5% growth pa but with
emphasise on downside risks and continued slow down across most
• 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
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
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
• Distributional issues likely to worsen;
• All of these (except some aspects of demographics) depend on the
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?
• 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