The forecasts for next year are downbeat, but the market should move into a more lively tempo by 2018
Trying to predict what the property market is going to do is as difficult as trying to determine the weather before a bank holiday weekend. Not least because everyone wants to hear definitive good news while the forecasters want to hedge their bets.
When it comes to the housing market there appears to be some consensus that, while the short-term outlook is overcast, things should start to brighten from 2019.
Stephanie McMahon, the head of research at Strutt & Parker, says: “The differing of opinions between forecasters is an indicator of the uncertainty in the market. Things are far more difficult to predict because of the high number of upcoming global events.
“These include the shake-out from the US presidential election, the Dutch, French and German elections taking place throughout 2017 — and Brexit. Article 50 may or may not be triggered by the end of March 2017, we don’t know and so the impact is difficult to call.”
So what is predicted for property in the lead-up to Brexit and beyond?
Right here, right now
Last week Nationwide suggested that UK house price growth had stalled, registering no monthly increase in October for the first time in 15 months. Annual house price growth slowed to 4.6 per cent from 5.3 per cent in September. This week Halifax announced that UK house prices had risen by 1.4 per cent in October while annual growth eased to 5.2 per cent.
While the figures might differ, the trend is broadly the same, although the slowdown is not being attributed to the referendum. Martin Ellis, the housing economist at Halifax, says: “Annual house price growth has nearly halved from a peak of 10 per cent in March this year, but remains robust at 5.2 per cent. This expected slowdown appears to be largely due to mounting affordability pressures, which have increasingly constrained housing demand. While house price growth may ease further, very low mortgage rates and a shortage of properties available for sale should help support price levels.”
Robert Gardner, Nationwide’s chief economist, agrees: “UK house price growth has been remarkably stable over the past 18 months, averaging about 5 per cent. While this is relatively modest by UK standards, it is still well in excess of average wage growth. Over the past three years house prices increased by about 20 per cent while wages have risen by about 6 per cent. As a result, the typical house costs six times average earnings, up from 5.3 times in 2013.”
So what next?
House price growth Researchers say that the prospect of Brexit is likely to dominate the UK housing market in the short to medium term, putting a dampener on house price growth and sales. This could be further compounded if a general election were to be called.
Jones Lang LaSalle (JLL), the commercial and residential property services company, is predicting that house prices will rise by 0.5 per cent next year, with 1 per cent growth in 2018, and 2 per cent in 2019. Neil Chegwidden, the residential research director at JLL, says: “We are expecting UK housing markets to slow from current levels both in terms of transactions and price growth next year. This will be driven by Brexit uncertainty and a slightly softer economy. The outlook, however, is particularly unpredictable. Over the next couple of years we expect periods of volatility in terms of household and business sentiment as the Brexit road map unfolds, but the underlying shortage in supply will provide support in value terms.”
Researchers at Countrywide, the estate agency, have drawn a U-shaped curve for house price growth, with values dipping from 2.5 per cent growth this year to a fall of 1 per cent in 2017, and climbing back to 2 per cent growth in 2018. The research team at Savills is also predicting 2 per cent growth in 2018, climbing to 5.5 per cent in 2019.
“Brexit negotiations are expected to be concluded by early 2019, bringing to an end the two-year period of greatest uncertainty. As buyer confidence returns, low mortgage rates should mean there is capacity for a small bounce-back in house prices,” says Chris Buckle, an associate director in residential research at Savills.
Prime markets The luxury property market in London has been under a cloud since 2014 when, after a period of strong price growth, it was hit by higher stamp duty, closely followed by an extra 3 per cent levy for second-home buyers and investors. Now concerns about post-Brexit City employment and currency fluctuations are adding to its woes. The LonRes autumn residential review suggests that year-on-year transactions are down across the whole of prime London. Prices are down too. According to LonRes, in the third quarter of the year (July to September) buyers negotiated an average of 10.8 per cent off asking prices in prime central London and 81 per cent of estate agents experienced an increase in price reductions.
Savills forecasts a 9 per cent fall in values in prime central London this year and a 5 per cent fall in other prime London areas. Things will slowly get better, with Savills forecasting that prime central London will record an 8 per cent rise in house price values in 2019, with per cent in the rest of prime London. This pattern is reflected, although less pronounced, elsewhere. For instance, the prime markets in Scotland will see zero growth in values in 2017 and 2018, climbing to 4.5 per cent in 2019.
JLL is more cautious, predicting 1 per cent growth in house prices in prime central London in 2018, 3 per cent in 2019 and 5.5 per cent in 2020.
Regional variations London markets will have the biggest falls in house price growth, particularly at the most expensive end of the scale, according to the research team at Countrywide. “Some of that slowdown is entirely unrelated to Brexit. Higher stamp duty is taking its toll but, after several years of double-digit growth, expectations of future capital gain have also weakened, reducing demand. We expect to see recovery in 2018,” Countrywide says.
It predicts house price falls of 1.25 per cent in Greater London and 1 per cent in southeast and east England. The rest of the UK is forecast to fall between 0.25 and 0.5 per cent, with Scotland faring best with zero movement in house prices next year. In 2018 almost everywhere is expected to have house price growth return, with most of the country experiencing rises in value of 2 per cent. Northwest England is forecast to outperform the rest of the market with a 3 per cent rise and Wales will lag with 1 per cent.
Over the long term Savills’ researchers believe that while the north-south divide in property price growth won’t reverse there will be greater balance, with the East Midlands set for a 14 per cent increase in property prices over the period 2017-21, West Midlands 13 per cent, northwest England 12 per cent, and Yorkshire, Humber and Wales 10 per cent. Scotland and northeast England will fare less well with a 9 per cent increase and the east of England will do best with a 19 per cent increase.
Number of sales With so much uncertainty it seems inevitable that some people will defer house purchases. JLL forecasts that transactions will decline from 1.22 million this year to 1.08 million in 2017 — an 11 per cent fall.
Savills predicts a fall of 16 per cent over the next two years to 1.04 million in 2018 before starting a slow recovery. It predicts that buy-to-let mortgage buyers will be hardest hit, falling by a third by 2018, as a consequence of the extra 3 per cent stamp duty, reduced tax relief that is being phased in from next year, tighter lending criteria, and mortgage regulation.
Chegwidden is “very concerned” about the impact that Brexit will have on housing supply. “Housebuilders will inevitably exercise greater caution when times are more uncertain,” he says. He predicts that the number of homes that builders will start in England will slip from about 140,000 in 2016 to 134,000 in 2017 and 2018. If this comes to fruition, the government will miss its housing targets.
Looking to the future
“Assuming Brexit negotiations are not too detrimental, we could see a rebound in London housing markets in 2020, before the rest of the country follows,” Chegwidden says. As such he foresees house price growth of 5 per cent across Greater London in 2020 rising to 7 per cent in 2021.
Elsewhere growth of 4 per cent or more is unlikely until 2021. Over the next five years Chegwidden expects that the strongest house price growth outside London will be in the northwest of England with 18.1 per cent. Overall the UK will have a 13.1 per cent growth in house prices between 2017 and 2021 (with Scotland registering 10.9 and Wales 7.6 per cent), according to JLL.
The Savills five-year forecast is similar with 13 per cent house price growth across the UK, although it puts the east of England as its frontrunner with an increase of 19 per cent over the period. In this prediction Scotland achieves 9 per cent growth and Wales 10 per cent.
Overall the mood remains positive. Rory O’Neill, the head of residential at Carter Jonas, says: “With a clear run of political stability into 2017, it wouldn’t be a long shot to expect a return to 2014’s market peak.”
The Donald effect
By Carol Lewis
The election of Donald Trump to the White House this week could be good news for the British property market as international investors and buyers seek a safe haven outside the US.
Hamish Pound, a senior investment manager at IP Global, who has a number of dollar buyers keen to invest in British rental properties, particularly in the northwest of England, says: “Although the currency play [the pound gained against the dollar in the wake of the vote] has made pound assets more expensive, I think we will see a flight to British property. The core fundamentals of the market remain, with demand exceeding supply. Although we advise investors to have a hold period of five to ten years so they can weather shocks like Brexit and Trump’s election.”
Tim Macpherson, the head of residential for the estate agency Carter Jonas London, says: “As the world takes stock of Donald Trump’s election, we expect to see a movement of affluent Americans from major cities across the US into prime central London.
“The pound remains attractive to dollar-based buyers who still see relative market stability in London, and view it as a place to invest their money.
“Keen to shelter from any political and economic upset, a number of buyers registered with us during the presidential campaign, with a view to progressing their purchase should there be a Trump victory. Now that has happened, it is likely that a number of them will follow up on their initial interest,” says Macpherson.
“We anticipate a power shift between New York and London, with a wave of professionals from Hong Kong, Singapore, Malaysia and Tokyo, as well as investors from the Middle East, looking to do business in alternative locations to the US.”
Louisa Brodie, the head of search and acquisitions at Banda Property, says: “Banda has already had an increase in US dollar buyers in central London since the Brexit vote in June and now we are going to see more Americans considering a move to London. West London in particular has been popular for Americans relocating with their families, and our culture, legal and transport systems, language and educational facilities have always had an appeal.”
Case study: ‘We bought off-plan’
By Annabelle Williams
It is not only estate agents and researchers trying to predict what lies ahead for the property market. James Saunders and his wife, Claire, have put down a reservation fee on a two-bedroom home that is not due to be finished until the middle of 2019.
The couple, both 29, are hoping their existing one-bedroom flat in Clerkenwell, central London, will appreciate in value significantly and by the time they come to sell it in 2019, it will bump them up into a mortgage big enough for the two-bedroom place in 250 City Road, a development by Berkeley Homes.
“While some people might shy away from buying off-plan, we actively sought out a development that would take two to three years to complete because of the financial advantages it offers. We won’t move into the flat until the second quarter of 2019, but we have been able to buy a two-bedroom flat at 2016 prices. With price growth in central London set to increase further in the next few years, it is an obvious advantage,” James says.
It is a gamble. While London has a problem with a lack of affordable housing, in this post-Brexit climate not all forecasters expect prices to replicate the strong growth of previous years.
“We have seen people book big profits doing this, but we have seen people that are contracted to buy a property that is worth less than they have paid for it,” says Mark Harris, the chief executive of SPF Private Clients, a mortgage broker.
James accepts that there are risks to gambling on house prices, but believes he knows the area well enough to anticipate price growth. “I suppose it was an unusual time for us to buy a property, when the EU referendum was looming, but I work in property and I feel confident that the market will remain buoyant and robust in the immediate and long term,” he says.
“We have owned our Clerkenwell flat for four years already, but don’t plan to sell it for at least another three years, which allows it to mature in value, as well as allowing the area to mature in value, which narrows the price difference between our current and new properties and leverages our position to upsize.”
Why rents are set to rise again
By Carol Lewis
The property market may be dogged by uncertainty, but the outlook for the rental market is much more secure — here the only way is up. One thing on which forecasters are agreed is that over the next five years rents will rise.
Countrywide forecasts that by the end of this year rents for new tenants will rise 3.5 per cent. The cost of renting a room throughout Britain is increasing at twice the rate of renting a house, from an average £488 in September 2015 to £504 in September this year. In London the increase went from £690 to £724. A room now costs the equivalent of 67 per cent of the price of renting a one-bedroom flat — the highest figure on record.
Johnny Morris, the research and analytics director at Countrywide, says: “The increase in the price of renting a one-bedroom flat, particularly in London, is piling the pressure on the sharing market.”
There are regional differences too, with rents for new tenants rising fastest in the north; Manchester, York, Leeds, Liverpool, Glasgow and Leicester all showed rental growth of 5 per cent or more in the year to September.
Northern rents still have a way to go before the north-south rental divide is closed. Countrywide data shows the average monthly rent in northern cities was £841 in September compared with £1,079 in the south.
Countrywide also predicts that the proportion of British households renting will increase from 21 per cent to 25 per cent by 2018, and demand could outstrip supply, further pushing up rents.
Lawrence Bowles, a senior analyst at Savills, says: “Rental growth will slow next year because of the tightening of affordability and the effects of Brexit. Greater uncertainty, higher inflation and a weak pound will impact how much households can spend on rent. However, the barriers to homeownership remain high. Renting will remain the tenure of choice for younger households.”
Savills predicts that rents across the UK will rise by 2.5 per cent in 2017, 4 per cent in 2018, and 5 per cent in 2019 before slowing down to 3 per cent in 2020 and 3.5 per cent in 2021; a 19 per cent increase overall across the UK. London rents will rise by 25 per cent over the next five years, while in Bristol a 27.5 per cent rise over five years is forecast.
There were more landlords selling than buying in September and October this year. This reduced Britain’s rental pool by 6,180 homes over two months.