UK House Prices: Another Year of Growth Ahead
In a recent post, we discussed input cost inflation for UK housebuilders. We presented this framework which introduces our own proprietary Carraighill index of materials and labour costs. It subtracts these costs from house price growth to estimate the operating margin of the sector.
![](https://carraighill.com/wp-content/uploads/2021/11/UK-House-Prices-Table-1.png)
We are confident that cost inflation will ease in the coming year. This is discussed in another post where we outline our thesis for a return of disinflation. Many UK building materials are imported and should benefit from this trend. Uncertainty remains over labour costs as the UK has restricted low-skilled migration since Brexit.
Where our first post focused on costs, this piece will focus on house price growth.
The History of UK House Prices
UK house prices have evolved over several periods since the global financial crisis. These correspond with the table above:
- Post-Crisis (2009-2012): UK house prices fell 4.3% in 2008 before rising again to reach a peak of 9% in 2010. This initial burst of growth was short-lived, and price growth stalled in 2011 and 2012, leaving prices broadly unchanged over those two years. The share prices of UK housebuilders grew modestly during this period.
- Post-Crisis (2013-2016): This period saw an acceleration in UK house prices which peaked at 9% in 2015. The period average was 5.8%, and this saw a bull market in UK housebuilders. Share prices grew 41.9% each year over the period, and the 2008 losses were quickly reversed.
- Post-Brexit (2016-2020): Brexit led to an easing of the growth in UK house prices. The period average was 3.3%, and housebuilders entered a period of consolidation. The period was less volatile, but prices were clearly on a downward trajectory. Price growth almost touched 0% in 2020.
- Today (Since 2021): The pandemic has led to strong growth in deposits and a money supply surge from QE. Government supports and base effects have helped price growth reach a high of 12.8% in Q2 2021, with prices stabilising at 10.6% in August 2021. September data from Halifax and Nationwide indicate that price growth remains in double digits.
![](https://carraighill.com/wp-content/uploads/2021/11/UK-House-Prices-Chart-1.png)
![](https://carraighill.com/wp-content/uploads/2021/11/UK-House-Prices-Chart-2.png)
The outlook for UK House Prices
Our core view is that if demand exceeds supply, then new housing should always trade at a premium to replacement cost (i.e., it is profitable to build). Indeed, replacement cost for housing has risen significantly in the last year, which is clearly one driver of the recent increase. With many variables determining the outlook, the prospects for UK house prices will always carry a degree of uncertainty.
However, survey data indicates that positive price growth is expected over the coming year. The Royal Institution of Chartered Surveyors (RICS) produces a survey that asks its members whether prices are expected to be higher or lower 12 months from now. The balance of responses has been in the range of positive 60 to 80 in recent months, indicating a strong consensus for price growth.
![](https://carraighill.com/wp-content/uploads/2021/11/UK-House-Prices-Chart-3.png)
Where the survey indicates the direction of growth (positive or negative), we are interested in the size of this growth. As our framework above outlines, price growth must exceed cost growth for housebuilders to maintain an increasingly positive operating margin.
This led us to review price expectations over the last decade. There have been previous episodes with expectations above 60. These were 2014-2016 and in late 2019, just before the pandemic began.
![](https://carraighill.com/wp-content/uploads/2021/11/UK-House-Prices-Chart-4.png)
A regression analysis allows us to see the level of house price growth 12 months following the survey. The chart below reveals a solid relationship with an r-squared of 0.52.
![](https://carraighill.com/wp-content/uploads/2021/11/UK-House-Prices-Chart-5.png)
With the survey of house price expectations currently in the range of 60 to 80, this suggests strong house price growth 12 months from now. If prices follow the trend line, it indicates price growth of between 7% and 10%. Expectations at this high level have never been followed with price growth below 4% in the following year.
Conclusion: The outlook for UK house prices remains strong. With cost pressures likely to ease in 2022, this should allow for a wider operating margin for UK housebuilders.
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