The three biggest forces behind the price of houses are the levels of supply and demand in the market, the availability of mortgage credit, and the economy's health. So let's take a look at how each of those is shaping up for 2016, because they will tell us a lot about where house prices are heading.
Housing supply is running at around half the level of demand. Construction activity has slowed markedly in the second half of 2015, with housebuilding bearing the brunt. A worsening skills shortage and high materials and land prices are putting pressure on builders' costs. None of these factors will change materially in 2016. The government has doubled its housebuilding budget and it is still trying to liberalise planning law.
There are a number of schemes available to help homebuyers, in particular first-time buyers, get access to cheap mortgage credit. The most famous of these is Help to Buy, which has just been extended for Londoners, who face particularly high house prices. And the Bank of England's all-time-low base rate of 0.5%, where it has sat for several years to keep banks lending and the economy moving, has held mortgage repayment costs down.
But as the economy heals, policymakers at the Bank of England want to start raising rates to prevent any credit bubbles forming in a boom. The rate rise was expected by the end of 2015 but it never came because of external risks to the UK economy. It looks likely the first rise will come in 2016.
When it does, it could cool off demand in the property market by making mortgage debt more expensive, which would then ease some of the big pressure on the limited supply of housing.
While the UK economy is strengthening, there are a number of external threats to it. The domestic economy is getting stronger: wages are rising, unemployment is falling, growth is robust.
Falling oil prices hurting big British companies and the economies they do business with. These are major risks to the UK economy and, if they erupt, could hurt housing demand and construction firms.
The growth in London property prices has been stratospheric in recent years. It is seen as a golden investment opportunity – a high-yield safe haven. So foreign and domestic buyers have poured money into the market, helping to push up prices.
Moreover, the housing shortage is particularly acute in London due to tight planning laws, especially the green belt restrictions, making it difficult and expensive for developers.
Nationwide's house price index peaked at an annual growth rate of 11.8% in June 2014. Since then, it has slowed markedly to 3.7% annual growth in November 2015. For Halifax, annual house price growth peaked in 2015 at 9.7% in October. It is forecasting annual growth of between 4% and 6% for 2016.
Headline house price growth is slowing mostly because of London's slowdown. All regions are still anticipated to show solid house price growth in 2016.
Nicholas James are a family run Estate Agents in Southgate, North London. The first Nicholas James office was opened in August 200 by brothers Nicholas Panayiotou and James Panayiotou, bringing together a combined experience of over 25 years in property sales, lettings and management in Southgate.
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