This is Armchair Economics with Hamish McRae, a subscriber-only newsletter from The i Paper. If you’d like to receive this directly in your inbox every week, you can sign up here.
Rachel Reeves faces a challenging landscape as she prepares her Spring Statement, just weeks away. Despite the daunting economic outlook, there is a potential beacon of hope that could sustain the economy in the latter half of this year and bolster her position as Chancellor: the housing market.
The current economic climate is, at best, worrisome and, at worst, alarming. Growth projections have significantly dipped from the previously estimated 2 percent forecasted by the Office for Budget Responsibility (OBR) last October. The Bank of England’s recent interest rate cut was justified by the sluggish growth observed this quarter, and the latest purchasing manager indices from S&P Global indicate that the expansive services sector is shedding jobs at its fastest pace in four years. The OBR has submitted updated forecasts to the Treasury, and reports suggest that Reeves is planning substantial cuts to the welfare budget to restore fiscal balance.
An Anchor for the Economy
Amid the global uncertainty, there remains a traditional stabilizing force within the UK economy: the housing market. Historically, a robust housing market has prevented the economy from descending into a severe recession. As long as housing prices hold steady, consumer confidence tends to remain intact, which encourages continued spending. This phenomenon was evident last year, where growth began positively but then stagnated in the latter half. Nevertheless, house prices continued to rise, culminating in a 4.7 percent increase according to Nationwide’s index.
This year has commenced with a noteworthy uptick in house prices, likely driven by individuals rushing to complete sales prior to the anticipated rise in stamp duty effective April 1. Predictions for overall house price growth this year hover between 2 percent and 4 percent, aligning with Nationwide’s expectations. Knight Frank adopts a more cautious stance, estimating an average growth of 2.5 percent, but I have yet to encounter forecasts predicting a house price crash this year or even stagnation in prices.
A Store of Value
What accounts for this optimism? The primary explanation is that UK housing continues to be viewed as a reliable store of value amidst global uncertainties. Over the past 25 years, this trend has been consistent. Savills recently analyzed the UK housing market’s trajectory this century, revealing that property prices have surged by 257 percent in monetary terms, with a real-term increase of 92 percent when adjusted for general price inflation. Despite the turbulence of the past quarter-century, including the banking crisis, pandemic lockdowns, and the ongoing conflict in Ukraine, residential properties have proven to be a sound investment.
Looking ahead, while the pace of price appreciation might not match that of the previous 25 years, it seems improbable that prices will decline in nominal terms, especially given persistent inflationary pressures. Short-term forecasts from Statista suggest that by 2028, UK property values could rise by nearly 18 percent on average, with the North East and Wales witnessing increases exceeding 21 percent, while London experiences the slowest growth at around 14 percent. Savills holds a slightly more optimistic view, projecting an overall increase of 21 percent by 2028.
One Caveat
However, it is crucial to acknowledge an important caveat. While overall prices may perform well, certain property types and regions are likely to lag behind—flats, for instance, may be less desirable compared to houses with gardens. Nonetheless, two significant factors are propelling the entire market forward. The first is population growth; the latest projections from the Office for National Statistics indicate that the UK’s population is expected to increase by 4.9 million over the next decade, reaching 72.5 million. This influx of new residents will necessitate a substantial number of homes.
The second force is the transfer of wealth across generations, as the so-called Silent Generation and Baby Boomers bequeath their assets to Generation X and Millennials. This phenomenon, often termed the “great wealth transfer,” will reportedly result in £5.5 trillion being passed down in the UK alone over the next 25 years. While this presents significant social challenges—particularly for those who may not inherit wealth—it simultaneously provides robust support for the housing market. If house prices remain stable, not only will consumer spending be supported, but overall confidence in the economy will also have a solid foundation to build upon. While a temporary lull in the housing market is plausible come April, driven by tax increases, it is more likely to manifest as a dip or pause rather than a crash.
Need to Know
The great wealth transfer has become a focal point for the global financial services industry. It is easy to see why this topic garners attention; firms that can effectively grow a family’s wealth and facilitate tax-efficient transfers are likely to secure lasting relationships with future generations. Consequently, wealth management has emerged as a key area of focus for major banks, particularly HSBC and Barclays in the UK, although others are also striving for a piece of this lucrative market.
Nevertheless, a significant challenge looms: in a world where wealthier individuals receive superior services, those just beginning their financial journeys often struggle to access cost-effective, quality assistance. For those starting out—managing daily expenses, pursuing home ownership, and initiating personal pensions—the landscape can be daunting. The wealthier one becomes, the lower the percentage fees charged on their assets. To qualify as a high-net-worth individual (HNWI), one typically needs around £1 million in investable assets, yet this status is merely the starting point in the broader wealth hierarchy. The premier annual survey from Capgemini Research Institute examines the investment behaviors of HNWIs and ultra-HNWIs—those with over $30 million—highlighting that even achieving UHNWI status is only a step towards greater wealth.
Wealth is undoubtedly a captivating subject. As Scott Fitzgerald famously remarked, “Let me tell you about the very rich. They are different from you and me.” However, the financial strategies of the ultra-wealthy are of little relevance to those of us merely striving for sensible savings. The wealth management industry’s primary challenge lies in reducing costs to provide valuable services to those aiming for a comfortable financial future, who may find themselves excluded from elite financial advisory services. Two critical changes are needed: simplifying regulatory requirements to alleviate compliance costs, and leveraging AI technology to deliver high-quality services at a fraction of the current costs. Over time, the standard 1.5 percent annual fee for asset management can significantly erode cumulative returns, with even higher fees being common. This issue is paramount, but the great wealth transfer also presents a substantial opportunity for enterprises capable of genuinely assisting clients, as they fulfill both a social and economic role.
This is Armchair Economics with Hamish McRae, a subscriber-only newsletter from The i Paper. If you’d like to receive this directly in your inbox every week, you can sign up here.
