New Year Intro Insight – January 2018

Hello, Happy New Year and welcome to our 2018 Intro-Insight.

With the last of the pine needles swept away and resolutions stuck firmly to the fridge, it’s back to business as usual.  But what exactly happened in 2017 and what does 2018 have in store?

Here we present a brief round-up of residential market performance and news from 2017 along with this years industry predictions from those daring enough to dust off the crystal ball.

Results & News from 2017

Halifax

• Prices in the last three months of 2017 were 2.7% higher than the same time in 2016.

• Average price of £225,021 at the year end was 2.4% higher than January at £219,741.

• “House price growth slowed whilst building activity, completed sales and mortgage approvals remained flat, driven by a squeeze on wage growth and continuing uncertainty.”

Nationwide

• UK annual house price growth down to 2.6%, compared with 4.5% in 2016.

• London weakest performing region, with house prices down 0.5% year-on-year.

• “London saw a marked slowdown, with prices falling in annual terms for the first time in eight years, ending the year the weakest performing region for the first time since 2004.”

RICS

• UK sales volumes are likely to total just over 1.2 million in 2017.

• 2017 saw buyer enquiries stall, sales volumes stagnate and sentiment turn more cautious.

• The mood in London and the South East is much flatter than elsewhere.

RightMove

• 2017 finishes up with annual rate of +1.2%.

• December sees a seasonal price fall of 2.6% (-£8,178) in the property coming to market.

The Budget

• Target of 300,000 homes a year by mid-2020s, helped by the lift of the local authority borrowing cap for house building, new money for the Home Builders Fund, £2.7bn for the Housing Infrastructure Fund, £630m for delivering 40,000 homes across small sites, and £34 million allocated to developing construction skills.

• Stamp duty abolished for First Time Buyers (FTBs) up to £300,000 (capped on purchases up to £500,000).

• More tax changes for landlords, including removal of some Capital Gains and powers for local authorities to charge double council tax on empty homes.

Sale of new leasehold houses banned

• Ban on selling new houses on a leasehold basis and new ground rents to be set to zero.

• New-build houses on leaseholds rose from 22% to 43% between 1996 and 2015.

• “It’s unacceptable for home buyers to be exploited through unnecessary leaseholds, unjustifiable charges and onerous ground rent terms” - Sajid Javid, Communities Secretary.

The Forecasts

RICS Housing Market Forecast 2018

Housing market soft patch to persist through next year

• Overall sales volumes to soften slightly over 2018.

• National house price growth to halt, but lack of supply likely to prevent declines, with the exception of London and the South East where affordability pressures are taking their toll.

• Supply will be the prominent issue when assessing the housing market over 2018.

• Stamp Duty changes for FTBs are to have minimal impact on activity.

• Nationally, rents are set to rise by a modest 1%, while a modest decline is predicted for London and the South East.

Housing delivery

• Net housing stock up circa 217,000 in the year to 2017 (+20,000 (12%) the previous year).

• However, nearly 18,000 (8%) additional dwellings came from office conversions under permitted development.  It is improbable this can continue to contribute at this rate.

• Housing delivery is dominated by large private sector housebuilders.  If the 300,000 mark is to be met, commissioning by central and local government is also needed.

• The Budget did contain some positive announcements, however, many of the measures are not due to come into effect until 2019-2020 and an uptick in development will not immediately be reflected in the second hand market.  Stock remains close to all-time lows and the pipeline for instructions does not appear to be improving.  As such, there are no signs 2018 will see a turnaround in supply.

Sales volumes to edge lower

• UK sales volumes likely to total just over 1.2 million in 2017 (almost identical to 2016).  The market has plateaued at this level since 2014.

  • Survey evidence suggests near term outlook for activity is muted, with buyer enquiries having fallen into Q4 2017, suggesting a lack momentum into 2018.

  • Trends in London and the South East have been noticeably weaker compared to the UK and net enquires in both areas have been negative for a number of months.

• A significant obstacle is Stamp Duty:

  • The increase in the top rate of tax levied in 2014 is having a lasting impact, as is the 3% surcharge on second homes and phasing out of mortgage interest relief.

  • Although there is potentially some upside from recent Stamp Duty cuts for FTBs and this may create some additional demand, in many cases, those benefiting will have purchased in any case.  

  • Furthermore, experience suggests a reduction in tax will be capitalised in house prices.  The OBR estimates average prices will rise 0.3% due to the policy change.  This is backed up by HMRC analysis estimating the Stamp Duty holiday for FTBs for 2 years in March 2010 increased prices 0.5-0.7%.  

  • Consequently, overall, the policy is unlikely to stimulate much activity.

• Political and economic uncertainty is proving a hindrance and consumer confidence sentiment to ‘making a major purchase’ has declined noticeably over the past 12 months.

• The Bank of England’s November rate hike, the first in a decade, is likely to add to caution.

• Perhaps the biggest factor stifling activity in parts of the country is stretched affordability:  

  • The ONS says median house prices across England are now a greater multiple of average earnings (x8) than at any point in history.  

• Taking all of this into consideration, it is considered transactions will total roughly 1.15 million in 2018.  This would represent an approximate decline of 5% relative to 2017.    

Prices to see no change at the headline level

• Data is consistent with annual house price inflation fading over early 2018 and while the results are not signalling an outright decline nationally, growth looks likely to halt.

• Factors likely to provide some underpinning for prices going forward include:

  • Stamp Duty exemptions for FTBs.  The upshot is that both purchasers and vendors are likely to share the savings to some degree, placing upward pressure on prices.

  • Lack of stock is crucial.  Fresh demand and supply have become virtually aligned, curbing downward pressure on prices.

  • The labour market should remain solid, with minimal changes in mortgage rates.

• As such, the headline projection is that prices across the UK will see almost no change.  

• Nevertheless, this is due to growth in some regions counterbalancing declines in others:  

  • Downbeat sentiment is no longer confined to central London and is signalling price drops across inner London boroughs and wider South East in the coming months.  

  • It is considered prices will drift higher in most other parts of the UK, with the strongest gains in Northern Ireland, Scotland, Wales and North West England where house prices relative to earnings are nowhere near the level in London and the South East.

Rents to increase modestly

• Not helped by some policy changes over recent years, supply across the private lettings market is likely to face difficulties.

• The housing market survey in August 2017 showed 83% of respondents felt there would be net more landlords exiting the market over the coming twelve months.  

• This does not bode well for rental affordability and already there are growing signs that affordability constraints are taking their toll on demand:  

  • Across the UK, tenant demand stagnated in the 3 months to October 2017.

  • Landlord instructions also declined over 2017, meaning fresh supply is falling short.

• Consequently, rental growth expectations remain positive at 1%.

  • In London, near term rental growth expectations signal a flat to marginally negative outlook for 2018, on the back of a sustained period of weakening demand.

• Sentiment suggests a mismatch between landlords’ desired rental levels and tenants’ ability to pay, meaning supply in London is not being absorbed by demand.

• The longer term view on rents, both at the national level and across London, is that growth will strengthen to average a respective 3% and 2% per annum over the next five years.

  • Critically, these projections outstrip those for prices over the same period, meaning supply pressures could be even more acute across the lettings market.

Knight Frank UK Housing Market Forecast

• House price growth is expected to remain muted overall in 2018 amid increased economic and political uncertainty in the run-up to Brexit and muted forecasts for wage growth.

• The market is localised and stronger growth is expected in the Midlands, East of England and North West, a continuation of the trend in 2017.

• Once the Brexit deal is completed, rising momentum is forecast, however, variations in the prime housing markets in London and surrounds are set to continue.

• The UK may be entering a period of interest rate rises, however, these are expected to be low compared to long-term averages.

• While development levels are rising across the country, the shortage of new homes is unlikely to be reversed in coming years, and that will underpin pricing.  On the other hand, deepening affordability pressures and property taxes, will continue to weigh down.

• Main factors in order of impact over the forecast period:

  • Brexit, political upheaval, interest rates, UK economic growth, geopolitical factors, property tax changes.

RightMove House Price Index & Forecast

• National average forecast of 1% growth in asking prices in 2018:

• Price growth in lower / middle sectors of the market set to continue in 2018, with average growth of 3% for FTBs and 2% for second-steppers.

• Top of the ladder properties, predominantly influenced by re-adjustments in London and the commuter-belt, predicted to fall an average of 2%

Factors in favour of prices increasing

• Overall housing supply remains historically low.

• Estate agents’ stock of property for sale is tight overall.

• Historically cheap mortgage rates, with Help-To-Buy and lower SDLT.

• Transaction numbers remain robust as life-stage and lifestyle moves still need satisfying.

Factors in favour of prices falling

• Stretched affordability failing to be addressed by muted wage growth.

• Continuing reluctance of discretionary and higher-end movers during periods of uncertainty, with London influence being a weighty factor.

KPMG Prospects For London Housing Market (Forecasts)

Savills UK Cross Sector Outlook - Investment

Six trends for 2018:

• Development in demand.  Continued reform of the planning system is likely to provide more opportunities for development.

• Broader investment.  To include joint ventures with housing associations, private-sector products aimed at struggling potential FTBs and retirement housing.

• Pressure on BTL.  Mortgage regulation, rising interest rates and progressive cuts to tax relief will limit the ability of investors to expand their portfolios.

• Cash remains king.  Investment will be led by cash-rich private buyers and institutional investment. Overseas wealth will be pointed at prime central London.

• Subdued price growth.  Short-term prospects will be limited as economic uncertainty feeds into buyer caution. Medium-term prospects in London and parts of the South East will be constrained as buyers hit up against debt ceilings.

• Rise in North West.  Investment will shift towards regions offering higher yields. The North West is expected to deliver the strongest growth over the next 5 years.

In other news

Home is where the Hart is

The pastoral district of Hart in Hampshire has once again been named the UK’s best place to live according to the 2017 Halifax Quality of Life Survey.  This is based on residents' health and life expectancy, wellbeing, earnings, employment, a low crime rate and relatively good weather.

However, quality isn’t cheap and an average house price of £419,231 puts Hart at 8.8 times the average annual pre-tax local income, compared to the national average of 7.3 times.

The Orkneys in northern Scotland has retained 2nd place from 2016, secured by the highest employment rate in the UK at 87%, and 96.6% enjoying good or fair health.  Over ⅔ (35) of the top 50 best places to live in the UK are in southern England, with 17 in the South East, a further 9 in the East of England, 5 in the South West and 4 in London.

Southern districts are particularly strong in the labour market due to high employment levels and average earnings, on life expectancy and where adults rate themselves as in good health. Geography also benefits these areas with more sunshine and less rainfall.  In the North, most areas have better housing affordability conditions and benefit from urban environmental factors such as low traffic, crime rates and population density.

Sources & Further Reading