WHAT IMPACT IS BREXIT HAVING ON THE PROPERTY MARKET?
Following the referendum buyers and sellers paused to see whether job security and/or access to competitively-priced mortgages was likely to change. There’s no doubt some are taking longer to commit but most are negotiating harder so some prices have softened.
Around four out of five of sellers are buyers so the majority of customers tell us that the difference between the sale and purchase price is more important than the amount paid or received.
A succession of positive property data has prompted an upturn in fortunes for the housing market in September. For instance, the Office of National Statistics reported in October that average house prices are continuing to rise, driven by steep increases in London and the South East, despite predictions to the contrary. The market is “settling” with a “significant turnaround” in buyer inquiries which were up for the first time since February, according to RICS and Rightmove said confidence was returning to the market as asking prices were approaching their all-time highs, with signs of a seller’s market emerging in the north and a buyers market in the south.
But there’s conflicting signals from lenders. The Council of Mortgage Lenders (CML), tell us gross mortgage lending reached a 9 year high in September in spite of a 7% month-on-month drop and a dip in July. Mortgage approvals have fallen for the third month in a row in a statement from the Bank of England whereas the British Bankers Association (BBA) suggested High Street mortgage lending is down 21% - a 19 month low!
The government want to see the new realism in buying and selling spread to the land market. One of the biggest barriers to increasing the supply of new homes has been unrealistic price expectations of landowners.
The fall in the value of sterling since the vote has made materials from abroad more expensive for builders which has been partly offset by more sales to foreign investors, although some are waiting to see if values and/or sterling fall further. Overseas occupiers and investors have in the past been blamed for pushing property prices even higher. However, off-plan or bulk sales to these buyers underpin nearly every development – especially in London - so directly or indirectly help those seeking affordable homes to rent or buy.
If investors are deterred from buy to let by the recent 3% stamp duty levy and forthcoming tapering of income tax relief on mortgage interest and/or additional responsibilities, developers could lose out on substantial upfront payments which in turn often finance further building work – a classic vicious circle!
There was a lull in investor inquiries after the rush to beat the April 1st stamp duty hike but Rightmove tell us interest from buy to let landlords is up 30% since May.
The Mayor of London announced an inquiry into foreign ownership of property in the capital although Savills estimated overseas purchasers accounted for only about 7% of transactions last year!
According to RICS, the number of households renting increased from 2.3 million in 2001 to 5.4 million last year particularly due to the difficulty of finding affordable housing in sufficient quantity. As a result, 1.8 million more will want to rent rather than buy before 2025. The Institution has called for recent stamp duty increases to be reversed as well as further incentives to encourage more building in the sector on publicly-owned and/or derelict land and further institutional investment.
Major housebuilders seem to have shrugged off the immediate aftermath of the referendum reporting a pick-up in sales since the beginning of September. On the other hand, the construction industry has suffered a difficult August with the volume of private/public sector housebuilding down 1.5% or shrinking at its fastest pace for 9 months, according to ONS, after rising 0.3% the previous month which helped drag economic output down 1.3% over the past quarter – the largest drop this year. ONS said the fall was not linked to Brexit as the reduction in new infrastructure accounted for almost half the overall decline. Widespread uncertainty about the economic outlook has meant growth has slowed considerably since earlier in the year.
NHBC tell us the number of new homes sites in London has fallen by 62% year on year since the vote, so supply next year is likely to come under even more pressure.
The rate of housebuilding in the UK is currently the lowest in Europe which has only exacerbated the historic mismatch between supply and demand – especially in London.
Even if UK net migration falls as a result of the referendum, the government has re-iterated that a minimum of 200,000 homes per annum need to be built for the next 15 years at least. Help to Buy and other government initiatives will assume greater importance in the delivery of new homes given the potential of housing to help stimulate the wider economy.
The UK is currently building about 140,000 new homes per annum which is rising but still only amounts to just over half the 230,000 households being formed each year, according to the government’s own figures. The present shortfall has been estimated at over 1 million homes – and is growing.
A £3 billion Home Building Fund to provide housebuilders with cheaper funding and guarantees as part of the chancellor’s Autumn Statement on November 23rd is widely expected. Some details were announced at the Conservative Party conference which will include short term loans to SMEs provided it can be shown that, without the funding, the scheme would not progress as quickly – or at all!
Efforts will also be increased to reduce the time to obtain planning, improve accessibility to finance for smaller developers and investment in infrastructure and ensure a significant proportion will be built offsite in an attempt to double the speed of delivery.
There’s an acute shortage of social and affordable housing in the capital, estimated by EGi at 31,000 units last year, partly due to an increase in permitted development such as Office to Resi.
The problem has been partly offset by a record section 106 affordable housing funding via planning consents and institutional investment in PRS developments, such as build to rent.
While the difficulty of finding land at what developers consider fair prices continues, Build to Rent is attracting more attention. The greater consistency of income and less cyclical nature of demand for lettings compared with sales are significant attractions for institutional investors such as pension funds and insurance companies.
As a result, the number of professionally-rented units, under construction or with planning consent rose by 200% in the past year to reach 67,000 in October, according to the British Property Federation! The sector is even more popular outside London where the number of units grew by 400% from 7,112 in October 2015 to 34,415 today! Demand from ‘generation rent’ who can no longer afford soaring house prices seeking longer term, high quality accommodation is fuelling demand.
I anticipate development will continue to be focused on lower-value areas in outer London and beyond which rely more on domestic rather than overseas or investor demand where the strength of the UK economy and consumer confidence is more relevant. Better deals will probably be available in places with an over-supply of existing and/or new build property, but reduced confidence to take on longer-term debt will mean fewer new homes will be built to meet increasing demand, particularly in the capital.
The Bank of England reported a dip in housing market activity since the referendum but transaction numbers had proved more “resilient” than expected.
The Bank showed its determination to reduce the risk of recession by cutting already rock-bottom interest rates in August and indicating a further reduction is possible later in the year. In addition, lenders’ capital requirements were relaxed to allow an extra £150bn of borrowing whereas £170bn of money printing/quantitative easing and a £100bn scheme to force banks to pass on lower interest rates to households and businesses were introduced.
On the other hand, the British Chamber of Commerce (BCC) believes weak spending and a fall in investment are likely to bring economic growth to a near standstill this year with weakness persisting until at least the end of 2018.