The UK Housing Market: Good news for business

No signs of a bubble…

The EY ITEM Club Special Report on UK Housing contains good news for business. House prices are rising but there is little sign of a bubble. Far from it, as in most regions, house prices are still below previous peaks in nominal terms and significantly lower in real terms and measures of affordability and indebtedness are also in better shape than prior to the financial crisis.

…though London remains a risk…

London is in a different position to much of the rest of the country with an increasing population having to cope with a lack of new housing supply. The financial ratios are more challenging in London but this does reflect London’s success more than the impact of the policies designed to stimulate the housing market.

…but overall, its positive news for business…

EY ITEM Club expect house prices to rise but not at rates that would cause policy concerns. The forecast is for house price growth of about 6.5% a year. This growth will help to boost the economy firstly by its positive impact on house owner confidence as a result of increasing paper wealth, and secondly through the direct economic activity resulting from increased housing transactions as the market recovers at a sustainable rate. Lawyers, removal firms, DIY stores, furniture retailers and builders can all expect to benefit from a higher rate of home sales.

The boost to consumer spending and the service sector should feed through into the wider economy, supporting increased business confidence and creating the platform for increase investment. The EY ITEM Club “deep dive” into the housing market provides further support for the UK growth projections contained in the EY ITEM Club Winter forecast, GDP growth of 2.7% this year is very consistent with the housing market outlook.

…across many sectors…

Those businesses in sectors that benefit directly from increased housing market activity should ensure they are positioned for a continued upturn. House moves do drive increased spending on household goods and services and businesses need to ensure they have enough capacity to capitalise on a growing market.

There is also a demand for new houses, especially in London and the South East. With market prices rising, more and more projects may become viable and hence the construction and house building sectors should also take the time to review their plans and position themselves accordingly.

There is little in the EY ITEM Club report to suggest any need to raise interest rates quickly. For those businesses dusting off their investment plans, this is good news as the implications are that the UK economy appears to be in a stable condition and the housing market does not present a significant risk to growth.

…although there may be challenges in London.

The report does highlight the more challenging housing market in London where excess demand and inadequate supply have combined to create faster house price inflation. This creates opportunities for house builders but will create pressure on business models. As the cost of housing continues to rise so workers, especially those on mid to lower incomes, will find their spending power squeezed. This is likely to lead to either pressure for wage increases to restore affordability or a decline in the labour supply as workers decide London is too expensive a place in which to live. Businesses in London should assess their plans and how exposed these might be to a shock to the labour market. If there is a significant risk, options such as relocating functions to areas where housing is cheaper might have to be considered.

 

 


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