Economic Overview Christine Whitehead London School of Economics The Residential Funding Conference ICO Conference Centre London, July 5 th, 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 % 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; % -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.