Cogress continually maintains a pulse on the latest property market research and findings. For our investors benefit, we have summarised our research from Q1 2018, with a focus on key market topics.
Our Analyst team have attempted to interpret how this information is most likely to impact each of the key segments that may concern our investor community (namely homeowners, first time buyers, renters, landlords and developers) and arranged the information accordingly.
In our last quarterly review, we showed that the UK house price trend had reversed in the second half of 2017 and was starting to show a positive trend. The first quarter of 2018 has continued to show growth, however, Nationwide’s House Price index (below) shows this growth has been slowing since the start of the year.
Recent healthy rates of employment growth, a marginal rise in wage growth, and continued low interest rates would typically reveal a stronger performance in the housing market. However, subdued consumer confidence and economic activity continue to exert a modest drag on house price growth. The continued shortage of properties for sale helps to support housing prices, but this is still restrained somewhat by affordability levels.
Whilst national house price indices are a useful macroeconomic indicator, most individuals’ (and, indeed, institutions’) concern is at a micro level, depending upon the specific area into which they are invested. At the micro level the picture looks much more varied, with London sitting 17thout of 20 cities in Hometrack’s UK Cities House Price Index when ranked on a basis of three-month growth.
In our last quarterly overview, London also sat at 17thposition, indicating that London is still lagging in its recovery relative to the rest of the UK. Furthermore, in our last quarterly review, the percentage growth across all UK cities ranged from -6.0% to 3.5%, whereas the last quarter had a narrower range of -1.7% to 3.2%. Cities towards the bottom part of the table are certainly catching up and London, in particular, is starting to show better growth, with 0.9% growth in the last quarter compared to 0.2% in Q4 2017.
Within London the picture is again micro specific, Rightmove data below shows year-to-date growth by borough. The overall picture follows a similar trend to the last couple of years. Boroughs with high property prices have continued to suffer over the last year due to the change in Stamp Duty (SDLT) implemented in 2016 and broader economic conditions that have caused low negative trends in these areas. Whereas boroughs with lower values have, on average, experienced stronger house price growth due to their greater affordability as well major transportation developments making these areas more accessible.
While the order of the boroughs in previous quarters have been more predictable and in-line with the issues facing the London property market, the order this quarter appears slightly mixed. For example, Barnet has performed very strongly in relation to the rest of London and significantly better than previous quarters. By contrast, Southwark has fallen to the bottom of the list (in previous quarters the borough sat closer to the middle of the group).
It is hard to fully explain this change; however, we may be starting to see a rebalance driven by over demand in lower value boroughs and a modest revival of some of London’s slightly more expensive boroughs.
In our last quarterly update, we noted that rents in London and across the UK had risen year-on-year towards the end of 2017. The start of 2018 has shown a similar year-on-year growth, but to a slightly lesser extent (HomeLet graph below).
Whilst the UK Average trend is usually more subdued than the London trend, the last quarter has shown that UK Average rents have risen year-on-year by approximately the same amount as London, with the exception of March 2018. In our last quarterly update, we discussed that the recent alignment of London and the UK average year-on-year growth is partly driven by people moving out of London and renting in more affordable key commuter areas around the capital. However, this driver doesn’t seem to have impacted London rents, with London March rents growing stronger than the rest of the UK based on a year-on-year analysis.
In our last few quarterly reports, we discussed the challenges landlords have faced over recent years thanks to stricter regulations, reductions in tax relief, and a stamp duty tax hike for buy-to-let landlords. While buy-to-let mortgages unsurprising fell in 2017, there have been two factors that have helped landlords shoulder these rapidly rising costs, keep rents relatively stable, and prevent a mass exodus of buy-to-let landlords.
Firstly, the Bank of England’s Term Funding Scheme (TFS) has injected a significant sum of low-cost capital into banks to boost the supply of cheap funding into the economyfollowing the Brexit vote. Secondly, record low interest rates have also kept borrowing costs low.
However, with potential interest rate rises in 2018 and the TFS ended as of February this year, we’re anticipating upwards rental pressure from buy-to-let landlords looking to exit the property market.
In previous quarterly overviews, we discussed the disparity between homes planned and homes required across a wide range of prices, particularly in London. We further referred to Savills research that the delivery of homes for the lower income sectors is not particularly feasible when considering land and building costs, as well as demand in those areas. The below diagram from Savills shows areas in yellow where the average price per sq ft is less than £450 – with most being tough routes for commuters. Some of these areas, however, are set to benefit from the new Elizabeth Line planned to open at the end of the year.
Furthermore, developers are continuing to look at key commuter hubs around London where building costs are approximately the same but land values are more reasonable. Importantly, new builds in areas outside of Greater London can easily fall within the Government’s Help to Buy scheme.
Developers are also keen to reduce construction costs, and modular construction is increasingly becoming more of a mainstream building method. Modular construction is quicker and cheaper when compared to traditional build. However, since the method is not yet used by enough developers, there isn’t enough data to see if this building technique has had any impact on prices.
The first quarter of 2018 has been filled with mixed expectations of an imminent interest rate rise. The consensus among market commentators is that there will be further interest rate rises in 2018 following the raise in November 2017 to 0.5%. This is the level that interest rates were at when the UK voted to leave the EU in the June 2016 referendum. However, recent comments by Mark Carney, the Governor of the Bank of England, have dampened expectations of a rate rise in May, with the recent release of softer economic data prompting more dovish comments from the central bank.
UK inflation levels dropped more sharply than expected to 2.5% in March 2018 and this is another reason for the Bank of England to hold-off on an imminent rate rise. Also, with the majority of all mortgages now on a fixed rate, and interest rates already hovering at historically low rates, the impact of a small interest rate rise, say +0.25%, is only expected to have a marginal impact on housing price growth and activity. Even for households looking to re-mortgage this year at the end of their fixed period, it is likely they will have the opportunity to fix at lower rates than they were already on.
Nationwide House Price Index, March 2018, www.nationwide.co.uk/hpi
Halifax House Price Index, April 2018, https://www.halifax.co.uk/media-centre/house-price-index
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