Moody's: Migration and rental trends expose London and South East to house price pressures

House price inflation in the UK will soften in 2019, with migration and rental market trends exposing London and the South East to the most pressure, says Moody's Investors Service ("Moody's") in a report published today.

Moody's report, "Housing - United Kingdom: Migration and rental trends expose London and South East to house price pressures", is available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release. Moody's report is an update to the markets and does not constitute a rating action.

"In 2019, we expect net migration to be lower, affecting both the housing and rental markets, especially in London and the South East", says Rodrigo Conde Puentes, Assistant Vice President and Analyst at Moody's. "The house price slowdown, however, would be modest under a negotiated Brexit deal and greater without one".

House price trends in London and the South East are more sensitive to changes in migration than other regions, because these areas have a combination of the highest: (1) negative migration pressure, where the construction output rate slightly outpaced population growth; (2) house price inflation rates over the last decade; and (3) levels of debt-to-disposable income.

The rental market is also likely to be less attractive for Buy-To-Let (BTL) investors and landlords next year, according to Moody's.

Nationwide, both average rents and house prices have been rising since the financial crisis, more so in London and the South East, with prices increasing faster than rent. Such disparity means that London's rental market will be less attractive for BTL investors and landlords. The latter could exit the rental market through selling, to take advantage of higher house prices. The sell-off would increase the supply stock in the primary market, reinforcing downward pressure on house prices.

Moody's base case assumes a negotiated Brexit deal with low inflation house-price rates of 2-3% over the medium term. In the event of a no-deal Brexit, however, the macroeconomic outlook for the UK would weaken, leading to outright declines in house prices nationally.

Moody's notes, however, that any deceleration in house prices will be less severe than during the last financial crisis, given less inflationary stresses within the market.

"In the three years before the 2007 crisis, house prices had risen by around 15%, compared with just 4% in the last 36 months", says Greg Davies, a Vice President and Senior Research Analyst at Moody's. "Also, while disposable income levels remain very high, they are still lower than pre-crisis levels; the increase in the debt to disposable income ratio in the last three years at around 3.5%, has been more moderate than pre-crisis at around 18%", explains Greg Davies.

The report is available to Moody's subscribers at: http://www.moodys.com/viewresearchdoc.aspx?docid=PBS_1139176 .