Cogress continually maintains a pulse on the latest property market research and findings. For our investors benefit we have summarised our findings of Q4 2017 and discussed some key topics for 2018.
Furthermore, 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 house price trend had reversed and started to show a positive trend. The last quarter has continued to show a modest rise despite relatively soft retail sales over the Christmas period as the squeeze on household incomes continues to take its toll. 
Even with the recent rise of the Bank of England’s Base Rate in November, mortgage rates are still very low. This, combined with an ongoing shortage of properties for sale and low unemployment levels, is expected to continue to underpin house prices over the coming months.
Whilst national house price indices are a useful macroeconomic indicator, most individuals or indeed institutions care at a more micro level depending upon the specific area into which they are invested. At this level, the picture looks much more varied with London sitting 17th out of 20 cities in Hometrack’s UK Cities House Price Index when ranked on a basis of 3-month growth. In our last quarterly overview, London sat at 12th position, indicating that London is lagging in its recovery. Furthermore, in our last quarterly review, the % growth across all UK cities ranged from -0.4% to 2.9%, whereas the latest quarter has a considerable wider range from -6.0% to 3.5%. This shows a diverging trend appearing.
Within London the picture is again micro specific, Savills data below shows year-to-date growth by borough. Overall London has shown significantly weaker growth over the last year when compared to the year before (October to October). The boroughs with the highest average prices have suffered most heavily over the last 2 years most considered attributable to the changes in Stamp Duty (SDLT). However, some growth has started to emerge even in a couple of the more expensive boroughs such as City of London and Westminster, however the other inner London boroughs still show poor or negative growth. Those boroughs on the outskirts of London have shown stronger growth, yet significantly down on their performance the previous year.
In our last quarterly update, we noted that despite the trend in Q3 of rents decreasing, we expected the drop to be short lived. HomeLet’s data for the last quarter of 2017 has shown just this, with rental prices year-on-year picking up towards the end of the year.
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. We expect this to be partly driven by people moving out of London and renting in more affordable key commuter areas around the capital. It remains to be seen the impact this will have on rents in those commuter areas and if resulting rises discourage people from moving out there. Our impression is that space over affordability is the main driver of surbanisation and that rent rises will continue to grow accordingly as people look to make a lifestyle choice outside of London.
In our last few quarterly reports, we discussed the challenges landlords have been facing over recent years with stricter regulation, reduction to tax relief and stamp duty tax hike for buy-to-let landlords. While buy-to-let mortgages have unsurprising fallen 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 cheap capital into banks following the Brexit vote to boost the supply of cheap funding into the economy, and secondly, record low interest rates have also kept borrowing costs low.
However, with the recent interest rates rise, expectation of further rises in 2018, and the TFS scheme ending in February 2018, upwards rental pressure (from further buy-to-let landlords looking to exit the property market) is expected to be around the corner.
In our previous quarterly overview, we discussed the disparity between homes planned and homes required across a wide range of prices. 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 shows those areas with most being tough routes for commuters. However, developers are continuing to look at key commuter hubs around London where despite building costs not being significantly cheaper, land values are obviously 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.
For the first time in 10 years, the Bank of England’s Monetary Policy Committee voted to raise interest rates 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.
More recently, the Bank of England warned that it plans to raise interest rates further from as early as May. Mark Carney, the Governor of the Bank of England, said that the strength of the economy warranted higher borrowing costs. He further explained that rising average wages, resilient GDP growth and above target inflation were reasons to begin pushing interest rates up. Even with clear messaging coming out of the Bank of England, the upcoming rise is not expected to increase levels to those seen in earlier decades, such as the average rate of 11.5% in the 1980s.
Any small rise in interest rates in the first half of 2018 such as +0.25% is not expected to make a big difference to the housing market. Mortgage rates are already hovering at historically low rates and while some of the increase in interest rates may be passed on to new and existing homeowners, there are two crucial factors that will limit any significant effect.
Firstly, there is very strong competition for mortgage business that will hold back providers from raising their rates to uncompetitive levels. Secondly, two thirds of all mortgages are on a fixed rate and will therefore face no change in rates. Even for households looking to re-mortgage at the end of their fixed period, it is likely they will have the opportunity to fix at lower rates than they were already. This all subdues the implications of a further small interest rate rise on housing price growth and activity in the housing market.
 Nationwide – House Price Index – January: https://www.nationwide.co.uk/-/media/MainSite/documents/about/house-price-index/2018/Jan_2018.pdf
 Halifax – House Price Index – February: https://static.halifax.co.uk/assets/pdf/mortgages/pdf/January-2018-House-Price-Index.pdf
 http://www.telegraph.co.uk/property/renting/slow-rental-growth-london-drags-average-uk-rents-prices-set/ https://www.bankofengland.co.uk/markets/quantitative-easing-and-the-asset-purchase-facility
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