TRANSACTION NUMBERS TO REMAIN LOW
The slowdown in the Central London housing market was no surprise – it simply continued the trend that began immediately after the introduction of higher Stamp Duty rates for sales above £937,500 in December 2014. At that point, buyer enquires fell steeply.
Post-Brexit economic uncertainty has undoubtedly been a drag on the UK housing market but the primary cause of confidence draining out of the market was the Government’s decision to increase Stamp Duty to unprecedented levels. Put simply, UK buyers do not understand why anyone would pay between 8-12% tax in cash on a house purchase. Its particular targeting of buy to let investors has only added to the malaise.
Owner occupiers, second home buyers and investors all put plans on hold. Even if government listens to calls for Stamp Duty to be reduced in 2017, the weakness in the London market will mean that transaction numbers will return only slowly and prices will take longer to recover.
We do not however, expect to see distressed sales or bank repossessions in our areas, even if there is a period of price corrections because most owners have low levels of borrowings – including investors. The Bank of England’s concern that investors may flood the market with stock for sale is illogical because property generates better returns than other investments in a low interest rate environment and certainly better than cash on deposit. Lenders acted responsibly in the period after the GFC in 2008 and we see very few owners who are over-exposed from their property investments.
That said, the sales market is more balanced going into 2017. Owners have become more realistic on pricing and, in the final months of 2016 buyers finally showed the first tentative signs of returning to the market, reassured that the fiercely competitive market experienced between 2009 and 2014 has finally subsided.
Buyers will remain cautious in 2017 and tread carefully towards buying decisions in the hope that prices may fall further. We expect the general slowdown to extend over the wider London market in 2017 and we forecast further small price reductions averaging 5% across Midtown, City and Docklands in 2017, returning prices to 2013 levels. It may well take a further 2-3 year period for house prices to recover.
Stock turnover across Midtown, City and much of East London will remain low throughout 2017 as so many properties are owned by investors who tend to hold property for the longer term. In any event, Central London property owners rarely feel the need to sell in a buyers’ market.
The current correction is more severe than the 2008 downturn in London, that was fundamentally a banking crises linked to the sub prime mortgage markets and matches the forecast given by George Osborne the former Chancellor of the Exchequer of a price correction in the region of 18% in the event that the UK was to leave the European Union.
House-builders will return their attentions to overseas buyers in 2017 – especially if sterling remains weak – in order to help generate much needed sales. Future developments are likely to be put on hold until sales volumes improve. It will be difficult for the mayor to realise his housing targets if house-builders cannot see any prospect of profitable business.
All of this has repercussions for the rental market. With lower margins for investors, the generation that lost its opportunity to buy will get another chance to get a foot on the housing ladder. Bank of Mum and Dad seems to have become a less enthusiastic lender in 2016.
On the other hand, without the spectre of escalating capital values, and in the face of uncertain economic conditions, many tenants will be happy to remain longer in the rental market. While they remain as renters, many can gradually accumulate capital for a deposit – sometimes from earnings, or through promotion, inheritance or combining resources.
The stock of rental property will continue to expand for a while longer as pre-sold developments are completed. Some developers have now abandoned their sales ambitions and instead converted the stock to long term rental investments. This may be the time that institutional investors manage to acquire or build rental portfolios at scale.
But the government continues to lash out at the rental sector. At the end of 2016 it pledged to ban agents from charging administration fees to tenants. In Scotland, where this was introduced earlier, it has added to landlords’ costs. Someone will have to pay for the services and it remains to be seen who will pick up the cost of referencing, undertaking right to rent immigration checks, inventory check-ins and check-outs, registering of the tenants’ deposit with an approved scheme, preparing rental agreements, addendums and the additional costs of processing tenant-instigated swaps mid tenancy
We expect to see a gradual recovery in demand and price growth in 2018 if, by then, the Government has makes significant and meaningful concessions on Stamp Duty