Never say never, but the UK housing market has weathered the first few months following the EU referendum result in reasonable style. However, it’s important to remember that there is a big difference between the performance of the housebuilding sector and the health of the existing housing stock.
Major housebuilders recently released results for the period ending in June, and the consistent theme running through the numbers is that everything worked well before the referendum. But, crucially, early indications show that, aside from the usual seasonal lull, the buyers have not deserted the market. The truth is that nothing much has changed other than people’s perceptions of what might happen next.
Maybe it’s time to put to rest some of the more ridiculous hyperbole dreamt up around the time of the referendum. House prices have not collapsed and are unlikely to. Mortgage rates are not about to spike higher, and unemployment is falling, not rising. Of course, house prices at the top end of the market in prime central London have come down, but this was happening long before the referendum, as overseas buyers took a step back in the wake of higher property-related taxes.
Taking the secondary, or existing housing market, homeowners naturally took fright in the wake of the referendum, and transactional volumes suffered as a result. This created a kind of stopper in the housing chain because people looking to move to a more expensive property or even downsize into a smaller one stayed put, restricting the number of properties coming on to the market. This had two effects. In a perverse way, a shortage of property coming on to the market helped to underpin prices, and here we’re talking about the real world outside prime central London. As one regional developer observed, we’re not looking for a collapse in house prices because we’re still waiting for the so-called boom (as experienced in the London hotspots).
House price inflation has certainly slowed. This is good – unless you are a seller – because it makes the cycle that much more sustainable. For housebuilders, the situation is fairly clear. Mortgages are cheaper than ever, while demand is higher than ever at a time when there remains a chronic undersupply of new homes.
Government policy
We have great faith that there will be positive measures announced in this year’s autumn statement. Reading between the lines suggests that the fiscal reins may be loosened a little in a way that will stimulate growth. For the housing market, there is considerable room for manoeuvre, especially in the wake of the ill-disguised attack through legislation introduced in the past year. The bottom line here is that badly conceived taxation has done little other than to expose the gap between political objectives andhousebuilding aspirations.
Lobby groups such as the British Property Federation have done a good job of highlighting the basic requirements to solve the housing shortage. However, there remains a huge gap between what needs to be done and what is being done. Building one million homes by 2020 is a laudable aspiration, but a recent survey of interested parties revealed that 83 per cent see this as little more than a political posture that has little basis in reality.
There are other potential storm clouds on the horizon that the government’s policies on Help to Buy will have to address. At the moment, you can use a Help to Buy individual savings account (Isa) for houses costing £250,000 or less outside London and £450,000 inside London. The problem here is that, if average valuation increases continue even at a moderate pace, nearly half of all districts in England will be ineligible by March 2017, and that includes 26 London boroughs, some of which already have average prices exceeding the limit. Northern England (with the exception of Harrogate), Wales and Scotland are expected to have average prices low enough for buyers to be able to afford a home using the scheme. Since the Isa’s introduction in December last year, Tower Hamlets and Harrow have since seen average prices rise above the threshold. The Help to Buy equity loan scheme provides more flexibility, but even here the scheme is restricted to purchase prices of £600,000 or less.
Planning and red tape
Housebuilders complain, with justification, about the constraints within the current planning system. A chronic lack of resources in local planning offices, objections to new developments (everyone wants more new houses, as long as we can’t see them from where we live) and objections to building on greenbelt land. Smaller builders have also had to contend with the restricted availability of finance from banks; lending on speculative developments is hard, if not impossible to come by. However, a new measure passing through the parliamentary hoops is expected to provide finance for small and medium-sized developers, with emphasis on reducing red tape.
Much attention has been paid to the housing market in the London area; this was already under pressure before the referendum as both house prices and potential buyers were hit by the increase in stamp duty imposed in April. In the wake of the June vote, there was every expectation that the rental market would suffer the same fate, but there is mounting evidence that this has not been the case, although there appears to have been a shift in the type of property that renters are looking for.
London-focused estate agent Douglas & Gordon revealed that August was its strongest ever month for lettings, up by nearly a third on a year-on-year basis, with a 20 per cent jump in enquiries from relocation letting agents working on behalf of large international companies with bases in London. Much of the demand is centred on emerging prime areas where the rental rates are lower, with a greater tendency to rent apartments rather than houses. It’s also interesting to note that most of the new enquiries are coming from France, Germany and Italy, which stands the idea of a post-referendum exodus on its head.
The future for the sector
It’s probably still too early to say whether the post-referendum bounceback is sustainable. What we do know is that the housing market is a cyclical beast; the problem is that no one knows how long the current cycle will last, and whether the housing sector will be put to the sword as in 2008, or simply slip towards a more benign retrenchment.
The latest post-referendum data suggests that the underlying picture remains bright. According to the Council of Mortgage Lenders, gross mortgage lending in August was the highest August since 2007 and was 7.1 per cent higher than in July. Transaction volume is lower but also recovering. And a recent survey by estate agent Knight Frank showed that confidence in the housing market is now virtually back to where it was before the referendum. Expectations for price rises are also consistent with further data from the Royal Institution of Chartered Surveyors highlighting a sharp recovery in price expectations among surveyors. So whereas nearly half of all regions in the UK were expected to see prices falling in the immediate aftermath of the referendum, research now suggests that every region is expected to see price gains over the next year. The icing on the cake comes from government figures that showed non-seasonally-adjusted housing transactions of 110,000 in August, the same as recorded a year earlier.
So what can upset the apple cart? The principle influence is the economy, as this affects potential buyers’ and sellers’ perceptions about whether or not to make a move. So far, the economy has held up well, helped along by more funding from the Bank of England and the prospect of another cut in interest rates. Mortgage availability remains good, and repayments have never been cheaper, but a rise in interest rates could have a major impact on affordability. But we see the prospect of a significant rise in interest rates as remote.
Employment is another key consideration. But, despite the harbingers of doom, the number of people in work is at a record high. Affordability could be another key factor as house prices have been rising faster than wages. The effects have been mitigated to some extent by lenders extending earnings multiples on loans, but there is a limit to how far this can be stretched. On the plus side, slowing house price inflation will help to ease the pressure.
Ultimately, we get back to the same problem. Private housebuilders will not and never have built enough houses to meet demand. The answer is to build more affordable homes, inevitably renting out a bulk of these to those unable to afford a deposit and mortgage payment. In the old days, these were called council houses; the trouble is that councils aren’t building houses, while housing associations have struggled against a tide of barriers, and are not filling the gap. More needs to be done to address this problem, but that means money. And while the solution is obvious and clear to see, politicians with good eyesight are another matter.
