SALES MARKET GRINDS TO A HALT
2016 was a momentous year for the UK, marked by its mid year shock decision to leave the EU and drawing to a close behind the US’s unlikely election of Donald Trump as its 45th president.
Six months on from the EU referendum and after enduring 2 years of the most punitive stamp duty rates, the market actually seems to have reached a state of relative calm. The ‘new normal’ is a low transaction, post-growth environment. Buyers and sellers have accepted that prices are no longer rising and their behaviour has become more predictable as a result. The same can be said of landlords and tenants who enjoyed a stable market in 2016.
A low growth London market is not unwelcome but it does have consequences. The number of sales completed across Midtown, City and East London in 2016 was 60% lower than in 2015 and 2015 was already 20% lower than 2014. That experience is representative of the wider Central London market according to Land Registry data. It has led to some ‘post Brexit’ price reductions but, if buyers are not in the mood for buying, no amount of price reduction will change their minds. Indeed seeing prices reduced can undermine confidence in the whole idea of becoming a homeowner. Despite price reductions of around 5% in H2, transaction levels remain stubbornly low.
As we have said many times before in this research report, Central London owners are rarely forced-sellers and when prices are flat or falling, owners simply choose not to bring their properties to the market. That leaves fewer options for those who want to buy, increases the supply of rental stock and yields less stamp duty for the Treasury. The fact that house moves are known to be one of the key triggers for consumer spending, supporting retail sales of homewares, furnishing and DIY, will be on the government radar.
While all is quiet on the sales front, activity has been channeled into the rental market. Not only are disaffected vendors deciding to let their properties instead of selling but prospective buyers are choosing to rent rather than own a home – thus, crucially, demand and supply for rental property have both increased although the boost to supply has been greater. Supply has had an influx from three sources: investors (who rushed to buy ahead of the April stamp duty deadline on second homes), owners (who have been unable to sell at the price they hoped for) and developers (who have completed schemes pre-sold to investors).
At the same time the government targeted Landlords with additional taxes including an additional 3% stamp duty that was added to investment purchases in April 2016. This further eroded the return along with new restrictions on investor’s ability to offset interest on a buy to let mortgage against tax from the rental income which will begin to take effect from April 2017. This is part of a wider anti-landlord agenda which is intended to improve the chances of first time buyers getting onto the housing ladder.
The spectre of Brexit has undoubtedly cast a shadow over 2016 and residential sales were hit by a period of inactivity leading up to referendum. It is a shadow that is unlikely to lift any time soon, particularly since the high court decision to give parliament the right to vote on triggering Article 50 – and Theresa May’s appeal. With so many factors in doubt – trade tariffs, border controls, cultural attitudes, political sympathies, employment trends, business confidence, and now the date of Article 50, the temptation for buyers and sellers to ‘wait and see’ is strong – and without capital growth, there is no pressure to make to a hasty decision.
Residential property markets are driven by the utter inevitability of life events – birth, death, and marriage but in Central London demand is highly discretionary with confidence in the London economy, jobs and the property market all influencing buyers of pied-a-terres, apartments for children studying in London and investments. In 2016 all of these buyer groups decided to stand back and watch and in doing so they lost confidence in the market as so few properties were sold.
We ended the year with a very welcome sense of realism as buyers and sellers began to return to the market with some reassurance that life after Brexit may not be as daunting as some campaigners had feared.