Housing Market Forecasts www.hamptons.co.uk Beyond your expectations
Housing Market Forecasts Housing Market Forecasts Hamptons International House Price Forecasts The Outlook for the Economy and Housing Market England & Wales 2014 8.6% North East 2014 5.4% A sound recovery, but not without risks. 4.0% 2.5% North West 2014 5.3% Wales 2014 2.9% 2.5% 2016 3.0% West Midlands 2014 4.5% 3.5% South West 2014 6.8% Prime 2014 13.5% 0.5% 2014 19.9% 2.0% Yorkshire & Humber 2014 5.3% 3.5% East 2014 10.0% 2014 16.1% 1.5% South East 2014 11.0% It s the economy, Stupid. The key quote of Bill Clinton s 1992 Presidential campaign is just as relevant to the UK housing market now as it was in the US back then. The economy is picking up strongly, with annual growth in 2014 at three per cent. But sentiment about the continued pace of recovery is weakening as global economic conditions, especially in Europe, falter once again. On the upside, wage growth should improve in the next two years, which will help ability to buy. The Bank of England expects pay to grow in real terms in both and 2016 as inflation stays below its two per cent target. That s partly because the strength of Sterling keeps imports cheap, but also because of the fall in global commodity prices such as oil and food. Rising wages and lower inflation means households will feel richer and that will boost the economy and the housing market. There are some offsetting factors though. The poor state of public finances means that austerity isn t going away. That is a particular threat in the UK regions most reliant on the public sector. In addition weaker growth in Europe means that there will be less demand for our exports and that threatens the pace of economic recovery. In the housing market sentiment shifted sharply in 2014, particularly in London, due to deteriorating affordability, new mortgage market regulation and growing talk of concerns about the housing market from the Bank of England. On top of this, worries that the UK s recovery may be vulnerable, have moderated expectations of how much further prices can rise. Most of the concern is focused on London but the change in mood is affecting the rest of the country too. Uncertainty about the election, mansion tax and the pace of economic recovery will all dampen the prospects for the housing market in, but some of this will be neutralised at the beginning of the year as the reform of SDLT provides an incentive to move sooner, before price growth erodes the benefit of the tax cut. Further ahead we expect conditions to improve in 2016 as economic recovery becomes more established. However the availability of credit is a crucial factor for performance. While the prospect of interest rates remaining low until at least the autumn of has pulled mortgage rates down, the Bank of England Credit Conditions Survey suggests that lenders remain cautious about the future and that will limit the pace of price growth - just as the regulator intended. This background inevitably affects activity, although we do expect transaction growth in and the risks are to the upside as a result of the SDLT reform. 2016 should see some further growth as economic recovery spreads. With higher levels of stock for sale and slower price growth there are clearly prospects for higher activity. Much of the focus of recovery so far has been on first time buyers, especially given Help to Buy, but we also expect a pick-up in movers in. This is partly due to the SDLT reforms but also because we expect greater use of transitional arrangements by lenders to offer buyers softer affordability tests who are managing payments now but may not pass new, more stringent, affordability tests to move. That is driven by falling arrears and possessions and the Bank of England s research that reveals that borrowers are better able to withstand a two per cent increase in rates than expected. Overall we expect house price and transaction growth to be fairly modest for the next two years, but there are both up and downside risks. On the upside a SDLT reforms and a stronger economic recovery would boost confidence, but on the downside, lower expectations about future price growth, low wage growth and continued caution on the part of lenders could lead to a weaker outturn. In addition, uncertainties around the general election and housing market policies, including mansion tax, may continue to unsettle housing markets. Stamp Duty reforms will boost both activity and prices in the short term, as the majority of buyers pay less tax than before the reforms. Hamptons International Housing Market Forecasts 2013 2014 2016 Annual House Price Growth 3.6% 8.6% 4.0% 4.5% Transactions 790,200 880,800 908,500 975,000 Forecasts based on HM Land Registry figures for England and Wales 1 2
Housing Market Forecasts Housing Market Forecasts Regional Prospects As usual the national picture disguises some very different situations across the regions, both in terms of the economy and the housing market. London London s housing market recovery has been largely separate from the rest of the UK. Affordability has deteriorated faster and the effect of new mortgage market regulations has bitten hardest in the capital. As a result there is still room for faster recovery in prices and activity outside the capital, notwithstanding the fact that sentiment is weaker across the country. Even though London s economy is likely to be stronger, credit conditions will make it more difficult for pent up demand to be realised. This will change as economic conditions improve, but there is more of a cause for a pause in London than elsewhere. We shouldn t be surprised by some price falls, particularly in the early and mid-parts of, but economic prospects are relatively strong in the capital and the outlook for wage growth is better than the rest of the country too. The decision by some sellers to take this opportunity to move out to the country has led to an increase in supply but a feeling that prices have risen too quickly means there hasn t been the corresponding increase in demand. Stocks are up by 16 per cent in London, but applications are down by 30 per cent, which itself dampens house price growth. The experience of previous housing market cycles is that price growth in London slows London Price Performace Relative to the Rest of the UK London to UK Price Ratio 2.4 2.2 2.0 1.8 1.6 1.4 1.2 1 Source: Nationwide / Hamptons International Cycle of London outperforming the rest of the UK, and then underperforming as the house price gap closes. before other parts of the country and the ratio of prices in London to the UK narrows. If the same pattern is repeated, as we think it will be given the relative state of affordability, although prices will continue to grow in London over and 2016, they will do so at a slower rate than most other parts of England and Wales. Prime (PCL) The Prime market is the most independent of the London markets as it is least affected by the availability of mainstream credit. The value of property in this sector means demand can only come from a limited pool of wealthy buyers, many of whom are from overseas. But that does not mean that it is unaffected by market conditions elsewhere, particularly market expectations about future capital growth. But London does still punch above its weight as a global city for investment which means that interest will not dry up. Uncertainty is a feature that will affect the whole of the market, but in the PCL market where many have the choice about where to put their funds, there may be a greater effect. Stamp Duty reforms mean that this sector of the market is worse off. A 5m home would face an additional tax bill of 164,000 under the new regime. The potential for a mansion tax or other measures Moving to the next part of cycle where the rest of the country catches up Q4 1973 Q1 1975 Q2 1976 Q3 1977 Q4 1978 Q1 1980 Q2 1981 Q3 1982 Q4 1983 Q1 1985 Q2 1986 Q3 1987 Q4 1988 Q1 1990 Q2 1991 Q3 1992 Q4 1993 Q1 1995 Q2 1996 Q3 1997 Q4 1998 Q1 2000 Q2 2001 Q3 2002 Q4 2003 Q1 2005 Q2 2006 Q3 2007 Q4 2008 Q1 2010 Q2 2011 Q3 2012 Q4 2013 Q2 2014 In and Out of the Capital 17 Billion The amount Londoners have spent on homes outside the capital in the last 12 months. More than the total value of homes in Oxford. 35,000 Homes The number of homes bought by Londoners outside the capital so far this year. 14,700 Homes The number of homes bought by movers from the rest of the country in London in last 12 months. Hamptons International Regional House Price Forecasts 2013 England & Wales 3.6% 8.6% 4.0% 4.5% North East -1.5% 5.4% 2.5% 3.5% North West 0.5% 5.3% 4.0% 4.5% Yorks & Humber 0.7% 5.3% 3.5% 4.0% East Midlands 2.8% 6.2% 3.5% 4.0% West Midlands 2.7% 4.5% 3.5% 4.0% Wales 1.5% 2.9% 2.5% 3.0% East 4.0% 10.0% 4.0% 4.5% London* 9.7% 16.1% 1.5% 4.0% South East 4.2% 11.0% 4.0% 4.5% South West 2.8% 6.8% 4.0% 4.5% Prime ** 10.0% 13.5% 0.5% 3.5% *** 12.6% 19.9% 2.0% 3.5% that are politically attractive in a general election year are likely to play a part in the timing of activity but is unlikely to lead to flight given that the prospects for the UK are still strong. High prices and a lack of available supply in PCL displaced demand to helping to fuel prices. But demand also comes from the mainstream population, albeit relatively wealthy, but likely to have need of some mortgage finance. As a result tighter affordability regulations are beginning to bite as house prices have grown. In addition a change in future house price growth expectations and a desire to crystallise capital growth has led to a large increase in stocks for sale, but a fall in the level of demand. Stamp Duty reforms will generally mean a higher tax bill for properties over 1 million. We expect a significant slowing in price growth in central London. But the strength of the capital s economy will be a positive factor preventing any significant year-on-year falls. A boon for all sectors of the markets is the expectation that interest rates will remain lower for longer. *London is defined as the whole of **Prime is defined as the London boroughs of Kensington & Chelsea and Westminster *** is defined as the London boroughs of Camden, Hackney, Hammersmith & Fulham, Islington, Lambeth, Southwark, Tower Hamlets (Canary Wharf) and Wandsworth. North & Midlands In the North the recovery in housing markets has been constrained and prices are still below their pre-crisis peaks. As a result affordability has not rapidly deteriorated. However, this is counterbalanced by weaker economic prospects in the regions. The North East already has the highest unemployment rate in the UK and is further haunted by the spectre of public sector job cuts. The North West has a better outlook given the strength of Manchester, but growth is still relatively modest. The East and West Midlands are in a similar position to the North West. Local economic conditions are getting better and this should continue as the UK as a whole gets back on its feet. But these regions are more vulnerable than the South to economic volatility. Prices are still below the precrisis peak so affordability is better, but wage growth has been very weak. Stamp Duty reforms in the North and Midlands make a much smaller difference than elsewhere. Lower house prices mean that 40 to 55 per cent will see no difference in tax under the new regime The South East and West (Country) Markets The price gap that has opened up between London and the Country has already led to increased migration away from the capital into commutable areas further out, helping to support prices in these areas. The average price of a property in London is twice that in the South East and two and a half times the average in the South West. The South East still has a bit more to go given relative affordability and the increase in prospects due to the proximity to London. The East is similar. Both areas will continue to see some migration demand as people move out of the centre and cash in although this will wane. However the East is vulnerable it is traditionally volatile and while economic prospects should be good here, there are risks especially beyond the safety of well off Cambridge. Stamp Duty changes will mean most buyers are better off under the new system. Indeed even in the highest priced region of the South East, only two per cent of buyers would be worse off under the reformed stamp duty system. 3 4
Housing Market Forecasts Housing Market Forecasts Stamp Duty Reform The autumn statement brought an overhaul of the Stamp Duty Land Tax. The Chancellor has abolished the old slab structure of Stamp Duty. This is good news for the operation and efficiency of the overall housing market. It s the number of transactions that are the real signal of the health of the housing market rather than the pace of growth of house prices. This move should overall help to increase transaction activity, allow people to move more easily and with a lower financial burden. This in turn will help the labour market and the wider economy too. These rates are only paid on the value of the property within the threshold ranges so a property valued at 200,000 for example only Stamp Duty - Comparing New and Old Stamp Duty Payable 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 Total Rental Market Costs Our rental forecasts are based on the change in rents of new lets, measuring the change in costs for tenants who are moving and new entrants to the market. An alternative measure of rent growth, included in the official inflation measure, is the change in the total cost of renting. This accounts for both those moving, renewing and those part way through their tenancies. This measure is useful for understanding affordability and is a more stable option for modelling income changes pays Stamp Duty on 75,000 at 2% rather than on the whole 200,000 under the old regime. The new rates mean that buying a home up to 937,500 or between 1 million and 1.12 million will incur a smaller tax bill meaning that 72 per cent of buyers will pay less Stamp Duty and two per cent more, with the rest seeing no difference. Overall it s a good move to get rid of the slab structure, although abolishing Stamp Duty altogether would be even more efficient. Transactions are the most important indicator of a healthy housing market and ease of moving is also essential for labour market efficiency so reducing the financial hurdles is a very welcome move. 100,000 150,000 200,000 250,000 300,000 350,000 400,000 450,000 500,000 550,000 600,000 650,000 700,000 750,000 800,000 850,000 900,000 950,000 1,000,000 1,050,000 1,100,000 1,150,000 1,200,000 1,250,000 1,300,000 1,350,000 1,400,000 1,450,000 1,500,000 1,550,000 1,600,000 1,650,000 1,700,000 1,750,000 1,800,000 1,850,000 1,900,000 1,950,000 2,000,000 New Stamp Duty Threshold Old Stamp Duty Threshold Source: Hamptons International over time, particularly as it isn t as affected by seasonality as new lets. The impact of inflation from new lets takes quite some time to feed into total rental costs and generally only some of that inflation will feed into the whole market. For example the rental growth for all tenants this year has yet to reflect the changing market conditions for new lets. As we progress into we expect these to be reflected more in the total costs. New Stamp Duty Rates Index of New Lets Compared to Total Rent Index(1=Jan13) Price Band 1.12 1.10 1.08 1.06 1.04 1.02 1.0 0.98 0.96 0.94 Rate 0-125K 0% 125K - 250K 2% 250K - 925K 5% 925K - 1.5m 10% 1.5m + 12% How Does the New System Measure? 72% Pay Less 26% Unaffected New Lets Total Rent 2% Pay More Jan 13 Mar 13 May 13 Jul 13 Sep 13 Nov 13 Jan 14 Mar 14 May 14 Jul 14 Sep 14 Rental Forecasts Conditions in the rental market saw the first significant change this year since 2012. The fine balance between supply and demand that has kept the growth of rents in line with inflation over the last couple of years shifted in 2014. Demand increased and available stock fell putting upward pressure on rents. At the last count the number of new applicants registering to rent was 25 per cent up compared to the previous year, and stock levels down 15 per cent. As expectations of future house price growth have declined more landlords are choosing to sell, reducing the available stock, which is ultimately pushing up rents. Forty per cent more landlords have ended tenancies in order to sell their property so far this year compared to 2013. Meaning nearly 1 in 10 tenancies ending in 2014 resulted in the landlord selling. Rising prices and increased caution about how much more they can rise has seen the flow of tenants into ownership slow too. This combined with growing demand in employment centres as the economy recovers has led to growth in the pool of tenants actively looking for homes to rent. The shift in the market means that in the growth in rental prices for new lets is likely to exceed wage growth. 2016 should see pressures on stock ease. Changes to the rules around withdrawals from pensions taking effect in April are Hamptons International Annual Rental Price Growth Forecasts England & Wales 4.0% 4.5% 4.0% likely to result in more investment in buy-to-let property, which should lead to increases in the total available stock. As fears around the election fade, and the housing market recovery continues it is likely expectations of future price growth will increase too, encouraging landlords to purchase more. London and the South have always been a magnet for younger people, starting their careers. The stronger economic recovery in the South means that this has continued to generate demand in the rental market. Which is why much of the pressure in the rental market is surfacing in London and the South East. We expect to see higher rental inflation in these areas than the rest of the country, in both and 2016, along with key urban centres such as Manchester, Brighton and Liverpool also outperforming. While conditions have changed in much of the rental market growth in the prime areas of Central London such as Mayfair, Knightsbridge, Chelsea and Kensington looks set to remain subdued. High existing rents are limiting potential demand and relatively high stock levels mean rents are likely to remain flat. We don t expect to see any significant growth in rental values in Prime in the next two years. South of England Rental growth is likely to outstrip house price growth in for the first time since 2012 Price Growth Since Jan 2013 House Prices New Lets 6.0% 6.5% 5.0% All Rents Source: Hamptons International Source: Countrywide 5.5% 6.8% 5.0% 4.5% 5.0% 4.0% 5 6
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