James Knightley, Senior Economist at ING, suggests that UK housing demand and prices are firm, supported by a flood of buy-to-let purchases ahead of new tax changes, but medium-term risks are materialising. Key Quotes “The Royal Institution for Chartered Surveyors (RICS) suggests that the housing market remains in decent shape with a net +49% reporting prices are rising as opposed to falling. New enquiries are also strong, with a net 74% of respondents expecting more buy-to-let property investment purchases ahead of tax changes in April. This is good news for consumer confidence with a strong housing market also helping to drive robust sales for associated items such as home furnishings. However, there are likely to be growing pressures on the sector. Buy-to-let investment property purchases have been taking an ever greater share of the proportion of total house sales and given the less onerous conditions on loans there is some concern at the Bank of England over the implications for financial stability. Indeed, given the higher leverage ratios for these buyers, the risk is that if the market deteriorates, buy-to-let investors would be more likely to sell, exacerbating swings in house prices and posing more risks for banks’ balance sheets. This was alluded to by BoE Deputy Governor Jon Cunliffe in comments released on Tuesday. Consequently, we are seeing more initiatives to try and control lending to this sector with stamp duty rising for these sorts of purchases (an extra 3% tax on the value of the purchase) while tax relief is being reduced on buy-to-let mortgage interest payments from April 2017. The combined effects of this will reduce the attractiveness of investing in property and is therefore likely to reduce demand, particularly at the low and middle area of the market. Worries about Brexit and the potential impact on sterling and growth could also weigh on housing demand at the top end of the market. Foreign buyers have been a key part of the UK property markets upward moves, but with sterling falling rapidly and likely to fall further ahead of the Brexit vote we may see foreigners taking a back seat, which will more affect London properties. Then there is the pressure that the banks are under with financial markets clearly concerned about their general health. If the banks do indeed need to shore up their balance sheets this could restrict lending availability, which would have a negative effect on the property market. Consequently, we are increasingly thinking that the UK property market could lose steam over the next twelve months, particularly if the Brexit uncertainty, financial market volatility and a softer growth outlook dampen sentiment. Nonetheless, with the Bank of England set to keep policy very loose, we don’t see major issues for affordability unless the labour market dramatically weakens. This means we more expect a slowdown in price appreciation rather than any substantial decreases in prices, especially given the rapid population growth currently being seen and the lack of home building currently occurring in the UK.” For more information, read our latest forex news.