Maslow Capital London Update: November 2017

The headlines from Nationwide, which claimed house prices in London had fallen -0.6% y/y in October, should be viewed within a wider context. London is comprised of 33 different boroughs and house price growth would have varied greatly across them.

Although the Land Registry data lags behind the market, it can still be used to view the stark differences in performance across London, and to highlight why we shouldn’t have a knee-jerk reaction to headlines stating a -0.6% fall in London house prices.

The latest data to end September 2017 showed a marked difference in recent house price growth across the 33 boroughs, with some performing well and others seeing a correction. The largest falls in price remained contained within the prime central boroughs of the City of Westminster, City of London, Kensington and Chelsea.

London House Price Growth: 3-months to September 2017

Source: HM Land Registry

House prices in the 3-months to September 2017 also fell in Bromley, Barnet, Brent, Enfield, Lambeth and Hammersmith and Fulham. However, in several boroughs, house price growth was strong, including Hackney, Camden, Lewisham, and Redbridge.

And whilst the deterioration in house prices picked up pace in September 2017 in some of the areas mentioned above, in boroughs such as Lewisham, Redbridge, Haringey and Croydon, the data suggests price growth accelerated in that same period.

The correction in prices have been driven on the most part by the political uncertainty from the fallout of the EU referendum. The complexity of Brexit has become increasingly apparent. This has been combined with increases in stamp duty, and now concerns about further interest rate rises which has further lowered the consumers appetite for borrowing, and this has been felt across the capital.

London House Price Growth: 3-months to September 2017 and August 2017

Source: HM Land Registry

The chart below shows the rolling 12-month house price growth in the 3-main prime central areas of London and inner and outer London. Kensington and Chelsea, City of Westminster, and the City of London all continued to see a deterioration in values in September however, the falls in the City of London were much smaller than in previous months. The recent adjustment in the City of London could have signalled the start of a much wider London correction. The chart highlights that back in late 2007, the City of London started to record a price correction before the rest of London, which subsequently followed a few months later.

Rolling 12-month growth London house prices, %

Source: HM Land Registry

Meanwhile transaction volumes remain weak across the whole of London, with the September dataset showing little improvement in activity. Brexit and poor consumer appetite for debt continue to hold back activity.

London change in transaction activity: 3 months to July 2017 vs 3 months to July 2016

Source: HM Land Registry

The key trends impacting London house prices

  • Whilst new instructions have been falling across the country, London new instructions reportedly increased during 4 of the last 6 months with “a relatively smart pick-up cited in both July and August” (Source: RICS UK Residential Market Survey). However, London new buyer enquiries remain weak.
  • Steep stamp duty charges continue to have an impact on transactions at the top end of the market.
  • Changes in rules for mortgage lenders to buy-to-let investors with more than 4 properties will find it hard to raise finance
  • International buyers are still attracted to the London market and this has been boosted by depreciation of sterling. Savills have reported that the high-end market will bounce back once the uncertainty of Brexit has settled.
  • Help-to-buy continues to play an important role in London. Since Q2 2013 8,813 properties have been bought in London under the Help to Buy: Equity Loan scheme (source: DCLG). The announced extension of this scheme should have a positive impact in London.
  • In the year to end-June 2017, 518 planning permissions had been granted for major residential schemes in London. This was an 18.3% increase from the year to June 2016 (source: DCLG).
  • However, according to the DCLG housebuilding statistics, only 16,620 new dwellings have started in London in year to June 2017 which is the lowest number of starts over a 12-month period since 2012. (in the 12-months to June 2016, there were 20,860 new starts)

Contains HM Land Registry data © Crown copyright and database right 2017. This data is licensed under the Open Government Licence v3.0.

Will they, won’t they? What to expect (or not) in the Autumn Budget

The Autumn Budget is almost upon us and, we have been mulling over what important changes we expect the Chancellor to make.

We anticipate that there will be a change to the way Stamp Duty is structured: the publication of Theresa May’s White Paper earlier in the year identified a broken housing market, and coupled with this and the slowdown nationally in transaction volumes off the back of political and economic uncertainty, change to stamp duty would be a logical next step to fix this.

What we think is unlikely, but not off the table completely, is that there will be any big adjustment at the top end of the market, in the +£1 million category. A small reduction in the charges at the prime end could have a big impact on liquidity, however this is probably not where the Chancellor will be focussed.

A more plausible scenario is another stamp duty holiday for first time buyers, similar to that between 2010 and 2012, when properties below £250,000 were exempt from stamp duty. A move like this is unlikely to have much impact in London where average property prices are £483,568, according to HM Land Registry, but could help improve liquidity in the rest of the UK.  A stamp duty holiday together with the continuation of Help to Buy, will benefit this important part of the housing sector.

There have also been calls for the Government to remove stamp duty entirely for older homeowners, to encourage people to downsize. It’s hard to see how this could be implemented but supporters say this would help increase the supply of family sized homes. A guise of this in conjunction with further stimulus for increasing housing supply, rather than just supporting demand, may be at the forefront of the Budget. For example, the government could give corporate tax reductions to encourage developers to deliver new housing in certain areas where there is a particular supply and demand imbalance.

Lastly, in a bid to win back some popularity amongst the younger generations, we anticipate a probable shake-up of student loans, something that would help support the student sector.

Watch this space…

What does 2017 have in store for the housing market?

For a widely touted annus horribilis, 2016 ended on a surprising high for the housing market: the UK economy fared better than expected, housing market slowed but nationally prices held steady, and – at least for now – much of the referendum induced fallout abated.

Looking ahead, below are our themes and predictions for 2017:

stocksnap_wx191dv28c Article 50 and Brexit uncertainty

No prediction for this year would be complete without Brexit. Theresa May’s self-imposed deadline to trigger Article 50 by the end of March is looming closer but it remains unclear how this will impact the UK in the short and long term. What we can be sure of is that there will be further fluctuations in sentiment because of uncertainty.

What could this mean for the housing market?

Low transaction levels are the main driver behind flat growth forecasts for the market this year, although new builds may benefit from the lack of second-hand stock on the market. However, if concerns for the stability of economic growth increase and banks further tighten mortgage criteria, the likelihood of homeowners struggling to remortgage will increase and we are likely to witness a rise in repossessions.

The outlook for inflation

The Monetary Policy Committee (MPC) will spend the year closely monitoring inflation, which is expected to rise sharply.

What could this mean for the housing market?

Rising inflation will be felt by UK households who will see their disposable income eroded. Whilst low interest rates will continue to support households, any rise in mortgage rates will have a negative impact on the housing market.

Additionally, rising costs are already having an impact on the construction sector. Although the latest Markit/CIPS UK Construction PMI was very positive, inflation has led to a higher cost of raw material imports. Theoretically, this could lead to a slowdown in the pace of construction, although it is more likely that these costs will be passed onto customers.

What remains unclear is when the MPC will feel the need to step in and curb rising inflation with an increase in interest rates. The result of the Brexit vote has meant that its unlikely to be this year, but the impact of the rise in the cost of goods and services is one to watch in 2017.

 Housing market and affordability

The eagerly anticipated government housing white paper will be published this month, covering planning reforms to accelerate housebuilding and – presumably – address the issue of affordability.

What will this mean for the housing market?

Amid reports of the number of young homeowners in England continuing to fall and, according to Nationwide, national house prices at 5.3x earnings, the white paper is expected to focus on solving the housing crisis in this country. It is expected that it will include measures to support and enable local governments, home-buyers, and developers.

It is anticipated that the document will include amongst other things, measures to free up land for new supply, including plans for unlocking Brownfield Land and more details about the Starter Home Land Fund. This could be good news for developers and home-buyers, if new supply helps to curb rising land costs.

Changes in the Buy-to-let sector

The buy-to-let sector was hit in 2016 by the April increase in stamp duty, and in October, the Council for Mortgage Lenders reported that lending to landlords was down 21% year-on-year; prospects are likely to deteriorate further this year.

Further to this, the phased implementation of the Prudential Regulatory Authority’s (PRA’s) affordability stress tests came into force on January 1st 2017 and will restrict the size of loans available for landlords, and, buy-to-let investors will experience an increase in their tax on their rental income from April.

What will this mean for the housing market?

Many anticipate further falls in buy-to-let lending because of the new stress tests. However, many banks were already testing at a high level and it is unlikely we will see a repeat of the steep drop in activity we witnessed in 2016. Nonetheless, a further fall on the demand side from investors could negatively impact on pricing, especially with the surge of new supply planned, albeit the pipeline is still playing catch-up with historic shortfalls.

For existing landlords, rents are likely to increase further as investors try to offset tax increases with a rise in rents. This is within a very competitive lettings marketplace, with high demand for rental properties being chased by an increasing pool of prospective tenants. For renters, this is bad news.

 The rise of build to rent

The build to rent sector has become increasingly popular over recent years and it is likely that it will continue to grow at a fast pace this year.

What will this mean for the housing market?

The demand for rented property has never been higher. Pension funds along with other institutional investors are increasingly finding their feet in this sector of the market, investing in new homes and delivering high-quality rented accommodation. It is anticipated that the white paper will also address some of the complications around route to entry for these investors.

This year, we will likely see new partnerships between local authorities and the institutional market. In 2017, we believe they will look for solutions to make this work and support ‘Generation Rent’ and others priced out of the home-ownership market. This is better news for renters. They will have the option of renting from professional institutions, in accommodation built to a high standard, offering not just a home but a community space with the latest facilities and state-of-the-art technologies.