The analysts believe wider economic conditions could result in a permanently lower level of transactions and a further decline in the number of households with mortgages.
A report published by the business based at Oxford University predicts that over the next three years house prices will rise at an annual average rate of only 1%.
It added that it does not expect a majority of members on the Bank of England’s Monetary Policy Committee to support a rise in the Bank Rate until 2019, implying mortgage rates are unlikely to see any uplift soon.
“UK house price growth is running out of steam,” it said, “and with household incomes squeezed and the affordability of housing stretched, we think a prolonged period of very modest growth lies ahead. But the prospect of a crash is remote.”
Oxford Economics said there were three main reasons for its prediction:
- The first was weak growth in households’ real income, cutting the ability to save for a deposit or finance a move up the housing ladder, although it acknowledged that past periods of sluggish income growth had not always been associated with low house price inflation.
- Second was the consequence of recent tax hikes imposed on buy-to-let investors and second-home owners, which should be capitalised in lower property prices.
- The third, and perhaps most important reason, was the increasing unaffordability of housing to an ever-widening sub-set of the population. The ratio of house prices to earnings is almost back at its pre-crisis record and the income of the average mortgage borrower is close to £60,000, more than double the average annual wage.
The report authors suggested this third factor had implications beyond price growth, with both a permanently lower level of transactions and a further decline in the number of households with mortgages, continuing a trend which began at the beginning of the century.
Mortgage affordability cushion
However, the report acknowledges that record lows for both mortgage rates and mortgage affordability provide some cushion to the three negative factors.
Encouragingly the analysts believe a well-capitalised banking sector should mean risks around credit supply are minimal and so the big drivers of house price crashes in the past (sharp rises in interest rates and/or a credit crunch, with major job losses and recession following) look like remote possibilities.
“Overall, house prices are caught between a lack of traditional drivers of accelerating growth, but equally an absence of forces which have typically caused prices to fall. Hence, our expectation of a period of sluggish, but relatively stable, growth,” it concluded.