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What to expect from the housing market in 2018

The housing market is ending 2017 with a bang. And in the new year, the market will likely cool down, especially on the high-end, mainly because of tax reform.

Standard & Poor’s said Tuesday that its S&P CoreLogic Case-Shiller national home price index climbed 6.2% in October — 6% above its 2006 peak. Meanwhile, in November pending home sales were up annually for the first time since June and sales of existing homes reached its strongest pace since December 2006, according to the National Association of Realtors.

“2018 home sales will roughly be similar to what we see in 2017,” said Lawrence Yun, NAR’s chief economist, predicting that this year will end with about 5.54 million existing home sales, up 1.7% from 2016. Next year, Yun anticipates essentially no change, a decline of 0.4%, in existing sales.

“Home price gains will be softer with national median price increases of 1%-3%,” said Yun, predicting that median home price this year will increase by about 6%.

Home prices climbed throughout 2017 due to low unemployment, wage growth and historically low inventory. In November, the months-supply of homes for sale on the market plummeted to 3.4 months — the lowest since NAR started tracking inventory in 1999.

“Single family housing starts has a long road back,” said Robert Dietz, chief economist for the National Association of Home Builders.

In 2018, the NAHB expects a 5% growth rate in single-family housing starts, which is still well below the potential growth rate for the sector. Next year total starts will be under 900,000 homes in contrast to the sustainable rate of production of 1.2 million – 1.3 million of homes, based on population growth and the need to replace older housing.

”We will continue to under build,” said Dietz, adding that a shortage of skilled construction workers, rising lumber costs and land constraints are making it difficult for builders to keep up with demand.

New year to bring a much-needed inventory boost

Residential construction is expected to pick up in 2018 because of a provision in the new tax plan that provides pass-through entities a 20% deduction on taxable income, according to industry experts. Most homebuilders tend to be limited liability companies and S corporations. These pass-through entities don’t pay corporate taxes, instead owners of these entities report pass-through income on their individual tax returns and then pay taxes on it. Under the new tax plan, owners of pass-through entities can deduct 20% of their pass-through income.

For real estate companies that are not pass-through entities, the corporate tax rate cut to 21% from 35% will also help. Some believe that the cuts will compel builders to hire, increase wages and make investments.

“We will see a boost in the production of single-family homes for sale,” said Fannie Mae Chief Economist Douglas Duncan. “A reduction in taxes will give builders an impetus to produce.”

It helps that builders have maintained a positive outlook. Builder confidence for newly-built single-family homes increased five points to 74 in December on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) — the highest level in more than 18 years.

Shift to smaller, entry-level homes

Builders are expected to focus on creating entry-level homes. Many have already started to shift their businesses to target first-time homebuyers or retirees looking to downsize. Since 2014, the average square foot of a single-family house has been decreasing. In 2016, the average size of a house was 2,637 square feet, according to Census Bureau’s Characteristics of New Single-Family Houses Completed.

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Source: NAHB Cost of Construction a Home
Source: Yahoo News UK
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UK house price growth to slow dramatically in 2018, say experts

House price growth looks set to judder to a halt in 2018 or at best manage a small below-inflation rise, as the twin spectres of Brexit and rising interest rates put the brakes on the property market.

Following what some have called a lacklustre year, homeowners and those looking to sell in the coming months have been told to expect an underwhelming and subdued 2018, with a number of leading commentators predicting UK house prices will either stay flat next year or perhaps rise by 1% or so.

However, the prognosis for London – which according to the estate agent Savills has experienced house price growth of 70% over the past decade – is more downbeat, with many economists forecasting that prices in the capital will once again slide into negative territory.

A number of commentators are pencilling in UK average price growth of about 1%, which would mean property values falling in real terms. Of the two big lenders that operate well-known price indices, Nationwide said it expected property values to be “broadly flat in 2018, with perhaps a marginal gain of around 1%”, while Halifax allowed itself some wiggle room by predicting UK growth in the range of 0% to 3%.

Meanwhile, according to a Reuters poll of 28 housing market specialists published last week, property prices will rise by 1.3% nationally, but fall by 0.3% in London. The former figure is less than half the current rate of consumer price inflation.

But while much of the language used in the forecasts is gloomy – “a weakening market”, “muted” and “another tough year” are among the words and phrases that crop up – such predictions are likely to be welcomed by the burgeoning numbers of aspiring first-time buyers who currently cannot afford to join the housing ladder. Many homeowners had become used to viewing their property as a money-making machine, and some will find it hard to disagree with the assessment of Miles Shipside, a housing market analyst at the property website Rightmove, that “homeowners have had a good run” with the national average price rise over the last six years totalling just shy of 31% – equivalent to 4.6% a year.

Economists predict that a range of factors will weigh on house price growth in 2018. Continuing economic and political uncertainty in the run-up to 2019, when Britain is due to leave the EU, plus the possibility of further interest rate rises following November’s base-rate hike from 0.25% to 0.5%, falling real wages, weak consumer confidence and mortgage affordability issues could all act as a brake on the market.

However, shortages of homes for sale and continued low levels of housebuilding are likely to support prices, while last month’s abolition of stamp duty for all homes up to £300,000 bought by first-time buyers could provide a boost to those looking to get on the ladder – provided it does not push up property values.

The stamp duty cut was part of a package of government measures designed to address the UK’s housing crisis and boost the housing supply by 300,000 new homes a year by the mid-2020s. But last week the Royal Institution of Chartered Surveyors (RICS) said many of these measures would have little bearing on 2018.

In its forecast for 2018, RICS did not come up with a figure, but said UK house price growth was “set to come to a halt” over the course of next year, adding: “Come the end of 2018, prices across the UK as a whole will have seen almost no change with a year earlier.”

RICS said the “downbeat” data for inner London signalled that prices in these boroughs were likely to edge lower in the coming months, but added that “this negative outlook is no longer confined to central London”, with the wider south-east seemingly on course for “modest price declines”.

One of the more buoyant predictions comes from the property website Hometrack, which is pencilling in 3% house price growth for the UK as a whole in 2018. Its predicted increase for the UK’s top 20 cities is even higher, at 5%. These cities account for more than a third of the UK’s housing stock. However, Hometrack believes London will buck the trend: it said it was anticipating that property values in the capital would rise by 1% next year.

Many commentators are pencilling in price growth for the UK of 1% next year. These include Rightmove, whose data is based on asking prices. Its forecast chimed with those from two well-known estate agents. Knight Frank has predicted price growth across the UK of 1% in 2018, amid increased economic and political uncertainty in the run-up to Brexit, though it is expecting to see zero growth in the south-east and a 0.5% fall in prices in London.

Likewise, Savills said it believed average UK prices would rise by 1% in 2018. However, Savills appeared to take a bleaker view of the London market’s fortunes: it is anticipating that London will see a 2% fall in 2018.

Rightmove is also forecasting a further average 2% drop in prices in the capital next year, though it is predicting a 4% fall at the upper end of the capital’s market, dominated by £1m-plus properties.

Perhaps the biggest cloud hovering over the property market next year is Brexit, and what it could mean for people’s personal finances and the wider economy. Robert Gardner, Nationwide’s chief economist, summed up the thoughts of many when he said Brexit developments would be important but “hard to foresee”.

Source: The Guardian