Regional Residential Report, a solid start to 2016

How did the regional residential market perform in Q1 2016?

The economic fundamentals in the UK remain strong, and this is a trend that looks set to continue. The labour market is particularly robust and this is helping to underpin the housing market. Inflation is likely to remain at these historically low levels for some time and so the low interest rate environment will continue. So far, this year we have seen sales up 9% and price growth of 5.3% .

Economic backdrop

The UK economic backdrop remains largely favourable, with a slight uptick in GDP growth over the shorter term; it increased by 0.6% in the final quarter of 2015. This compares with 0.4% growth in Q3 2015, and represents a 2.1% annual increase in GDP. However, despite the increase, GDP growth has slowed compared with 2014, when the economy grew by 2.8%. The Bank of England has now cut its 2016 growth forecast from 2.5% to 2.2%, and for the next year from 2.6% to 2.3%. This partly reflects poor productivity growth.

The CBI has also cut its growth forecasts, to 2.3% this year and 2.1% next year, down from 2.6% and 2.4% respectively. The CBI said weaker than expected growth at the end of 2015, coupled with modest pay rises and slow productivity growth, had led to the downgrade. The global economic outlook remains weak, with concerns over growth in China and emerging markets. In addition, uncertainty over the EU referendum’s outcome means investment spending could be delayed. Despite downside risks, the UK is likely to remain among the fastest growing advanced economies.

The economic fundamentals in the UK look strong and set to remain this way. This is helping to underpin the housing market. In particular, the labour market continues to perform well, recording the highest employment rate since records began 45 years ago and the lowest unemployment rate since 2005, at 5.1%. Although wage growth is decelerating slightly, it is still translating through to real wage growth because of the benign inflationary environment.

Although inflation has been gradually increasing since October 2015 and jumped to 0.5% in March, its highest level since December 2014, it is still historically very low. A sharp increase in air fares, due to the earlier timing of Easter, was the main reason behind March’s rise. Overall, inflation has remained close to zero for well over a year, and is likely to remain at this level in the very near term. This reflects drops in food, energy and other prices, however, it will probably rise to around 1% by the end of the year.

As a result, the Bank of England’s Monetary Policy Committee (MPC) remains unanimously against raising interest rates. All in all, we do not expect any interest rate rises until early next year at the earliest. 

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