EY ITEM Club Special Report on Housing

Business implications

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Generally good news for business – but some warning signs in London

With house prices rising, little sign of a bubble, and the indicators in most regions in much better shape than before the financial crisis, businesses across the country should take heart from this report. London is clearly a special case, combining a growing population, strong economic performance and a shortage of new residential properties. But the challenges there are more a result of London’s own success than of any government initiatives to stimulate the housing market.

More generally, the projected UK-wide house price growth of 6.5% a year through to 2018 will boost the economy in two ways: first, through its positive impact on house owners’ confidence and spending; and second, through the economic activity that results directly from increased housing transactions. Lawyers, removal firms, DIY stores, furniture retailers and builders all stand to benefit.

At the same time, healthy demand for new houses – especially in London and the South East – will push up prices and make more and more projects viable. So the construction and house-building sectors should also review their plans and position themselves for growth. Equally positively, the report finds little evidence calling for quick rises in interest rates. This is good news for businesses dusting off their investment plans.

As mentioned earlier, the fly in the ointment may be London, where excess demand and inadequate supply have generated faster house price inflation. While this creates opportunities for house-builders, it will also put business models under strain. Ongoing house price rises will squeeze workers’ spending power, especially those on mid-to-lower incomes – leading either to upwards pressure on wages, or a decline in the labour supply as people move to affordable locations. Businesses in London should assess their exposure to such shocks, and maybe even consider options such as relocating operations to other areas where housing is cheaper.

Mark Gregory, EY Chief Economist

UK: Employment growth, 2013-18

EY - UK: Employment growth, 2013-18

Source: EY ITEM Club

UK: Loan to income multiple, 2013

EY - UK: Employment growth, 2013-18

Source: EY ITEM Club calculations using ONS data