Following a strong start to 2016, particularly in the lower to middle range of the UK housing market, that lasted up until the 3% stamp duty surcharge for anyone buying an additional property was introduced at the start of April, the residential property market has slowed with prices cooling across most parts of the country.
Property values increased by 4.4% year-on-year in November, the weakest annual growth for 10 months, the latest figures from Nationwide Building Society show.
House prices edged up by 0.1% month-on-month in November, taking the average property value across the UK to £204,947, which is in line with growth rates seen since early 2015, supported by the widening supply-demand imbalance in the market, improving job prospects, increasing wages and record-low borrowing levels. But the dominant narrative for the housing market remains Brexit-related uncertainty.
“The relatively low number of homes on the market and modest rates of housing construction are likely to keep the demand-supply balance fairly tight in the quarters ahead, even if economic conditions weaken, as most forecasters expect,” said Robert Gardner, Nationwide’s chief economist.
2016: A tough year
It is fair to say that 2016 has been an eventful year with the surprising outcome of the EU referendum, a new prime minister, president-elect Donald Trump, fears that Austria would elect a far right-leaning president, while Italian prime minister Matteo Renzi was forced to resign earlier this month after suffering a crushing defeat over his plan to reform his country’s constitution, ushering in a fresh wave of uncertainty across Europe. When it comes to expecting the unexpected, 2017 has a lot to live up to.
“While 2017 is set to be an uncomfortable year for the property market, I do not believe there are any major indications of a housing crash occurring,” said Will Herrmann, director of property developer West Eleven. “There are a number of significant headwinds in place within the industry to ensure that deals are slow, but nothing is big enough to completely pull the rug from under us.”
He added: “I do, however, expect 2017 to start much as 2016 is finishing: people trying to do business in the aftermath of the EU referendum. I think that the impact of Brexit will continue to be tempered by a stream of just enough bad news that people will hold back from making decisions on big capital outlays.”
Based on recent forecasts, the general view among agents is that residential property prices in the UK as a whole are likely to be flat or possibly rise marginally in 2017, although some agents are more bullish on seeing a return to sustained price growth in 2018.
Savills forecast that average UK house prices are expected to remain stagnant in 2017, before increasing by 2% in 2018 and 5.5% in 2019 to a total of 13% by the of 2021.
A supply-demand imbalance means rents will outperform house price growth, rising 19% over the same period, the property agents said.
“We are likely to see zero growth in property prices in 2017,” said Jeremy Leaf, north London estate agent. “But I would like to see more emphasis on transaction numbers rather than property prices, which should be increasingly relevant for serious property professionals, economists and politicians.”
The number of residential property transactions increased by 1% in October compared with the previous month, according to the latest HMRC statistics.
In total, there were 97,640 residential transactions in October, but while this was up on September, the data also shows that it was 8% lower year-on-year and significantly below the 165,480 recorded in March 2016, highlighting the unpredictable nature of our housing market.
“I think it is fair to say that, for many reasons, 2016 is not going to be remembered fondly by many,” said Marc Langdon, partner, Bidwells. “It was a year that began with the novel idea, or as many saw it a gamble, by our political elite of holding a referendum.”
Langdon pointed to the inevitable rush of people trying to secure buy-to-let properties before April’s stamp duty deadline as evidence that the market was “firing on all cylinders” but it also led to market distortion, as reflected by the spike in transactions in March and slump in April, while the Brexit vote added to the uncertainty.
Langdon continued: “As the impact of the tax changes began to subside, Cameron and Osborne’s gamble [the EU vote] didn’t pay off, thus leading to a lost summer and a considerable drop in transactions, particularly in central London and other markets throughout the UK.”
He believes that only a change in stamp duty in the spring Budget 2017 will help the market, a change which failed to materialise in the Autumn Statement, but one which should be considered if transaction levels in the middle price bracket of the market fail to pick up.
He added: “While housing has rebounded more strongly than expected after the Brexit referendum, the level of transactions has dropped considerably and we move forward with a fear that growth in 2017 will be notably slower than the previous 12 months.”
But there are some signs that the housing market is starting to witness a bounce back in activity levels, according to Richard Barber (below), director at W.A.Ellis, part of the JLL Group.
He said: “The general optimism of his [chancellor Philip Hammond’s Autumn Statement] speech and the fact the IMF predicts the UK to be the fastest growing economy in Europe, with 2.1% growth forecast in 2016, is perhaps the reason why, even in the run up to Christmas, we’re experiencing a surge of new business.”
“However, it remains to be seen whether the transactions that we are seeing at the moment are just the result of a pre-Christmas blip, or a more sustained uptick,” Barber added.
Whether the government’s target of building 1 million new homes over this parliament is a realistic one remains to be seen, but either way more needs to be done to increase the supply of much needed new homes across the country, which includes alleviating the challenges and obstacles facing residential property developers, according to the NAEA’s managing director, Mark Hayward (below).
The failure to construct enough homes to date means that Britain’s housing shortage has now reached crisis point, with the number of prospective buyers and renters dramatically outweighing the volume of homes on the market, while restricting the level of housing stock sales and letting agents have to offer.
Hayward commented: “It would be an understatement to say this year has not gone as expected."
"However, the property market is mostly still feeling the effects of events [including higher stamp duty at the top-end of the market] which happened last year.”
Prime central London
The high-end London property market in particular is suffering at the hands of increased stamp duty taxes, and while there is an oversupply of luxury new build homes in parts of central London, Hayward is not expecting a “property Armageddon” in 2017.
Nevertheless, the signs are that prime central London is set for another year of critically low transaction levels and moderately negative price growth, as high buying costs and economic uncertainty suppress demand.
“London’s golden postcodes are in stalemate going into 2017 and this is unlikely to change in the foreseeable future,” said Louisa Brodie (left), head of search and acquisitions at Banda Property.
But while demand from domestic buyers has slowed, the sterling devaluation has made UK property very attractive for international investors pegged to the US dollar or euro.
“The word is out, amongst the international community, that London property is cheap. The devaluation in the pound is seducing buyers from other currency denominations to purchase property here,” said Trevor Abrahmsohn (right), director of Glentree Estates.
“When you add the currency discount to the depreciation in values this amounts to a 50% discount which, hopefully, will prove irresistible to [international] buyers, when compared with other major financial capitals of the world, where prices have not depreciated i.e. New York, Frankfurt and Paris,” he added.
Mark Ridley, chief executive officer, Savills UK and Europe, concurred: “2017 activity in central London likely to be dominated by Asian investors, with American and Pan-European investors also strong nationally.”
But Ridley accepts that there remains “hesitation” on what Brexit will mean in the financial markets, and this will undoubtedly have an impact on the housing market, not just in London, but across the UK.
Looking ahead to next year, Knight Frank forecast that the slowdown in prices which has been evident in central London over the past 12 months will spread to the wider region, with Greater London prices down marginally in 2017.
This slowdown in the capital will likely be experienced across the rest of the country with price growth down notably on 2016 levels.
Liam Bailey (left), head of global research at Knight Frank, said: “The main drivers for weaker market performance relate to economic uncertainty surrounding the Brexit process, which we believe will impact negatively on consumer confidence in the run up to and just after the serving of the formal “notice to quit” the EU.
“In addition the impact of reforms to the taxation of landlords will reduce demand from investors which will limit upwards pressure on prices.”
Better ROI up north
Plans for the Northern Powerhouse scheme, designed to rival London and the South East as the main driver of economic growth in the country, by pooling the strengths of the cities and towns of the north as one cohesive unit, remain intact despite the UK’s decision to leave the EU and the fact that the David Cameron is no longer prime minister, while George Osborne, the now former chancellor and the man behind the Northern Powerhouse idea, was sacked by Theresa May.
“Building the Northern Powerhouse is a long-term government priority and central to our plans to rebalance the economy,” said Andrew Percy, who replaced James Wharton as Northern Powerhouse minister in Theresa May’s reshuffle.
With the plans for the Northern Powerhouse in full flow and the housing market in London currently being outperformed by other regional cities, a growing number of property investors, including buy-to-let landlords, are turning to other major town and cities in the north of England which tend to offer greater yields and potentially better prospects for capital growth, according to Stuart Law of Assetz.
“The UK’s rental sector has experienced a sea change over the past year as canny investors recognise that the North, not London, is where the best yields can be found,” he said.
Law (left) continued: “2016 saw buy-to-let investors begin to sell up in London and this could grow to a rush in 2017, but rather than leave buy-to-let we expect them to reduce mortgage debt and buy more for cash or with smaller mortgages in higher yielding locations around the country like Manchester, Leeds, Birmingham and many other regional cities.
“The lesson in 2017 that people must learn is that buy-to-let isn’t dead – it has just gone North.”
With homeowners in London and southern cities facing the greatest affordability pressures, Richard Donnell (below), insight director at Hometrack, also expects to see property investors target other areas across the UK.
He commented: “In larger regional UK cities, such as Birmingham and Manchester, affordability remains attractive and we believe there is room for further price growth over 2017. With this in mind, we predict that city level house price growth in 2017 will run slightly higher than the current consensus of 2-3%. But this will largely be driven by the scale of the slowdown in London.”
Jonathan Stephens, managing director of Surrenden Invest, agreed: “My prediction for 2017 is that we will see more of the same [buoyant activity in northern England] as enthusiasm continues to build around the Northern Powerhouse.
“With Article 50 set to be triggered next spring, bricks and mortar is the safest option, both short and long term, for investors,” he added.
The UK will begin the New Year with an uncertain future ahead, dominated by yet another landmark political event in the triggering of Article 50 of the EU’s Libson Treaty, which prime minister Theresa May has said will happen by the end of March 2017.
“The biggest talking point in 2017 will be triggering Article 50 to begin the process of Britain’s exit from the EU, and what immediate effect this might have on property prices and the value of sterling,” said Camilla Dell (left), managing partner at Black Brick.
Much like 2014, 2015 and 2016, when the Scottish referendum, the general election and the EU referendum took place, Jake Russell (right), director at Russell Simpson, believes the “UK will begin the New Year with an opaque and uncertain future ahead”.
“As with any trading market, uncertainty breeds caution and indecision, and as such we can expect continued low levels of activity,” he said.
Overshadowing this, however, is the “toxic” and “destructive” levels of stamp duty land tax, which “must be reconsidered by the government”, according to Russell.
Stamp duty reforms implemented by the government have slowed the housing market and raised half as much money as the Treasury predicted, and so it is unsurprising that there are calls for the government to review the tax.
The fact that there is no stamp duty charged under £125,000, then 2% up to £250,000, and 5% up to £925,000, may have helped activity levels at the lower to mid-segment of the housing market, but the 10% levy to £1.5m and 12% above that has had a negative impact at the top-end of the market, best illustrated by the slump in home sales and prices in London’s prime areas.
The introduction of the 3% stamp duty surcharge on buy-to-let properties and second homes has also contributed to the sharp fall in property sales.
“Disproportionately high stamp duty levies introduced in the last two years have done considerably more damage to the market, its associated industries and the supply of new homes than anything else, including an impending Brexit,” said Edo Mapelli Mozzi (left), CEO of Banda Property.
Simon Tollit, director of central London sales at United Kingdom Sotheby’s International Realty, also believes that stamp duty must be top of the housing agenda in 2017.
He said: “The biggest talking point in 2017 is undoubtedly going to be stamp duty, followed closely by further uncertainty surrounding Brexit.
“There have been an increasing number of campaigns launched recently in favour of slashing stamp duty and this is fully expected to continue into 2017, until the policy is addressed.”
While the housing shortage persists, interest rates look set to remain at ultra-low levels for the foreseeable future, and so it is not surprising that the general consensus is that property prices will remain broadly stable across many parts of the UK in 2017, albeit with a few price rises – and dips – in certain areas.
A poll of housing analysts, conducted by Reuters, found that house prices are expected to increase by 2% next year and 2.7% in 2018, although this will inevitably vary by region.
“The differing of opinions between forecasters going into 2017 is an indicator of the uncertainty currently going on in the market, things are far more difficult to predict than usual because of the high number of upcoming global events,” said Stephanie McMahon (right), head of research at Strutt & Parker.
Looking ahead, the company projects that over the next five years, Greater London is set to experience the greatest levels of price growth (16.5%), followed by the South East (16%), East of England (14.2%) and the South West (10%) - with single digit returns in the other UK regions.
The ongoing uncertainty around the UK’s exit from the EU will undoubtedly slow down housing market activity across the country in 2017, while creeping inflation and the pressure that it puts on goods and services as well as interest rates could also have a big impact, but ultimately the severe shortage of UK homes means prices should hold up. Unfortunately the same cannot be said for transaction numbers. Not unless there is a fundamental revision to the existing stamp duty rules and suddenly more certainty on the economic outlook.
Jeremy Leaf & Co
United Kingdom Sotheby’s International Realty
Strutt & Parker
*Marc Da Silva is Estate Agent Today and Letting Agent Today Features Editor. You can follow him on Twitter @propertyjourno