Peter Williams, Executive Director, IMLA and University of Cambridge Rethinking the Outlook for the housing market Peter Williams, Executive Director, IMLA and University of Cambridge

My presentation From positive to negative! Complex dynamics at work Many unknowns! Conclusions

The Economy Many negatives; Uncertainty for sustained period Rising inflation Weak Pound Even lower interest rates and for longer? Employment and wage outlook uncertain A Government? An Election? Scotland?

The Economy The question is not whether the UK will adjust but rather how quickly and how well. Bank is active – funds available and easing of countercyclical buffer The MPC will make an initial assessment on 14 July, and a full assessment complete with a new forecast in the August Inflation Report. MPC will also discuss further the range of instruments.

The Economy No Emergency Budget Likely to see stimulus measures –housing could benefit and not least affordable housing Still have Qs re Europe Concern re Current Account deficit Cuts still to come through? – on people, sectors and local government

Impacts of BREXIT

Geography of BREXIT shock

Impacts as per HMT Premia rise on government debt, steepening the government yield curve and raising bank funding costs. Corporate borrowing spreads would rise due to uncertainty and the steepening government yield curve. Uncertainty would lead to tighter financial conditions, a reduction in real economy lending and higher mortgage rates. Triggers reduction in consumption and investment and weigh on asset prices. Amplifies economic shock. A fall in asset prices would have a wealth effect. For households this would reduce spending and for businesses increase the cost of capital. Demand for housing would fall due to the higher cost of lending, The immediate economic impact of leaving would be around 10% lower relative to a vote to remain in the EU. In the severe shock scenario, house prices would be around 18% lower.

and so to housing and mortgages! And government (in England) We have the Manifesto with Commitments on housing supply and home ownership Will it/they remain? Reshuffle but we think so Starter Homes - more of a question – still not operational

Chart A.24 Home builders’ share prices have fallen sharply since the referendum FTSE All-Share and home construction share indices, 17 June–1 July 2016(a) Sources: Bloomberg and Bank calculations. (a) 100 = closing price on 23 June. (b) Market capitalisation weighted index of the eleven largest UK home builders in the FTSE 350 Household Goods and Home Construction Index.

So what do we know? Market was already slowing as buyers moved ahead to avoid SDLT changes London likewise Some evidence re renegotiations/hold by buyers/sellers Mortgage pricing has eased and more competition Prices may drop but demand might rise!

Policy can make a difference!

So what do we know? FCA says all regulations continue but ESIS transition? Housing supply might falter as builders cover their risks by reducing output We were on course to meet 1 million target ( new build plus conversions etc) Still assuming mortgage gtee goes at end of year but…..? And moves against BtL continue And uncertainty is the watchword!

Chart A.22 There is evidence of increased ‘bunching’ of mortgage lending flows at LTI ratios just below 4.5 Distribution of owner-occupier mortgage flows by LTI(a) Sources: FCA Product Sales Database and Bank calculations. FCA Product Sales Database includes regulated mortgage contracts only. Loan to income (LTI) ratio calculated as loan value divided by the total reported gross income for all named borrowers. Chart excludes lifetime mortgages, advances for business purposes and remortgages with no change in the amount borrowed.

Chart A Gross advances for buy-to-let lending Sources: Council of Mortgage Lenders, firm lending plans and Bank calculations.

Chart A.23 Recent uncertainty may have driven a fall in new buyer enquiries New buyer enquiries(a) Source: Royal Institution of Chartered Surveyors (RICS). The percentage balance of respondents reporting an increase in new buyer enquiries over the past month less the percentage reporting reduced enquiries. Series are seasonally adjusted

Conclusions Forecasting unhelpful at the moment CML sticking with previous numbers for the present June house price indices will be interesting but BREXIT late in the day Uncertainty is the new normal! Underlying demand remains strong

CML Forecast December 2015

Conclusions Housing issues unresolved and tensions growing around prices/affordability and availability Govt will feel under even more pressure to respond and not least as housing is strong boost

CBRE Report; The Long Goodbye Leave vote doesn’t reduce the pent-up demand in UK housing market. The prospects for mainstream residential hinges on consumer confidence. Expect a quiet summer for sales as buyers consider the wider economic implications. If economy were to slow sharply, low interest rates mean forced sales are unlikely. Don’t expect a marked negative impact on property prices. Indeed if developers scale back and new housing supply contracts significantly, there may even be upward pressure on prices. Prime London is most exposed to greater risk, but the underlying fundamentals remain robust. Overseas investors may benefit from a weaker pound, including institutions investing in large scale build to rent and individual investors. http://www.cbre.eu/portal/page/portal/uk-en/services/eureferendum#prclt-Byu29hk8