News in Charts: Will de-regulation lower UK house prices?

Having won a landslide victory in last week’s general election, the UK’s new Labour government now faces the challenge of resurrecting an economy that has been plagued by a poor trend rate of growth over the past few years. A large part of the country’s poor economic performance can be attributed to persistently weak investment, especially since the 2016 Brexit referendum. Indeed, Fathom calculations suggest that, had investment followed its pre-referendum trend, it would be around 15% higher than it currently is.

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Ironically for a centre-left political party, many of the new government’s early policy announcements have centred around deregulation. Among the most notable of these is the removal of an effective ban that had existed on the construction of new onshore wind farms since 2015. As can be seen in the chart below, that effective ban has slowed the rate of increase in electricity generation from wind. The new government will be hoping that the reversal of this can aid in its attempts to meet its target of net zero emissions by 2050.

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However, key to reviving business investment will be resurrecting housing construction, which represents around one-fifth of total fixed capital investment in the UK. As the chart below shows, the upward trend in the stock of per capita dwellings effectively ended with the onset of the global financial crisis (GFC), with the stock remaining broadly flat between 2007 and 2016. That said, it should be noted that some recovery has been seen in new construction over the past few years.

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The new government has pledged that the country will build 1.5 million new homes over the course of this parliament, with particular focus on ‘grey belt’ land (defined as “poor quality and ugly areas” on previously protected land). The latest ONS data indicates that there are currently around 30 million dwellings in the UK, implying that the government is aiming to increase this stock by around 5%. Fathom’s proprietary model for the UK housing market suggests that this would only knock around 5% off UK house prices, all else equal. Of course, all else will not be equal — most notably the size of the population, which the IMF expects to increase by around 2% over the next five years. In short, the Labour government’s construction targets will not be sufficient to ensure that the house price-to-income ratio will revert to pre-2000 levels.

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Indeed, Fathom’s analysis calculates that the bulk of the increase in this ratio in recent decades can be attributed to the availability of cheap credit and the long-run decline in real interest rates (lower borrowing costs increase the demand for housing). Consequently, a sustained normalisation of real rates to pre-GFC norms is likely to be a prerequisite for there to be any material fall in house prices. The odds of this occurring should not be ruled out — Fathom’s latest Global Outlook attributed a 60% chance of a ‘higher for longer’ scenario, whereby the combination of more active fiscal policy and sticky inflation sees steady state interest rates return part of the way towards their pre-GFC levels.

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The views expressed in this article are the views of the author, not necessarily those of LSEG.