New forecasting from economists at Lancaster University Management School indicates the UK housing market will remain stable as house price inflation slows to 3.5%.

They have been analysing house prices (using the Nationwide House Price Data) retrospectively since October 2015 to produce the Housing Market Observatory with the aim of analysing indicators patterns of exuberance, or price booms.

For 2017, they have introduced forecasting into the Observatory and results suggest that house prices in the national and all regional property markets will grow this year. For the UK national market, the forecasting models predict a slowdown in the rate of house price inflation to 3.5% in 2017 (in 2016 it was 4.4%).

Despite some economists predicting a price crash in 2017, the two main factors responsible for the positive forecasted growth in the housing market are (i) the sound domestic economic conditions (mainly a healthy growth rate of consumption), and (ii) the fall in the real mortgage rate (mainly due to the recent rise in inflation rate).

In producing the forecasts, the researchers considered ten economic variables as potential predictors of future house price; four regional-level and six national-level predictors. The variables measured at the regional level include the price-to-income ratio, income growth, the unemployment rate, and the growth in the labour force; whilst national-level predictors consist of the real mortgage rate, the spread between yields on long-term and short-term government securities, growth in industrial production, the number of housing starts, growth in real consumption, and an index of credit conditions which captures changes in lending policies and easing/tightening of prudential regulation.

In addition to those variables they also incorporated a structure of property price growth in contiguous regions to capture the effect of spatial correlation in house prices within the UK.

In regional housing markets, the predicted patterns of property price behaviour vary. The expectation about the future interest rate increases, which is an important determinant of housing dynamics in London but not in the other regional markets, puts a downward pressure on the house price growth in this region. According to the forecasting results, housing inflation in London will slow down in the first quarters of 2017, but the growth in property prices is predicted to build up towards the end of the year. Overall, the forecasts indicate a 3.9% growth in London property prices in the course of 2017.

The forecasts predict a similar pattern of house price behaviour in the regions contiguous to London, including Outer Metropolitan, Outer South East and South West. The property market of East Anglia, which is currently growing faster than any other regional market of the country, is predicted to slow down in 2017, but still remains the market with the highest housing inflation (the forecasts suggest that house prices in this region will grow by 5.7% over the year).

The UK Housing Observatory is a project of the Economics Department at Lancaster University Management School (LUMS) aimed at improving our understanding of the UK national and regional housing markets.

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