The summer months can be a notoriously difficult time in which to form reliable opinions of the state of the property market, due to the traditional slowdown over the holiday period. However, looking beyond this at the emerging trend data seen over recent months, there is clear evidence that the market is cooling in some parts of the country, but without signs of the significant correction which had been predicted by some market commentators.
Affordability tipping point?
Despite a growth in employment levels, house prices have become de-coupled from wage inflation over recent years, meaning rampant house price inflation was never going to be sustainable indefinitely. Having reached what many are now citing as an ‘affordability tipping point’, some overdue adjustment was due and the latest house price data from Halifax – recording a fourth successive quarterly fall in average prices – looks to show a natural adjustment to the rate of house price inflation, as reality re-aligns the market.
Supporting the market are the ongoing chronic shortage of properties for sale and historically low interest rates, so it will be interesting to see how the next few months pan out. Across the many regions in which Garrington operates, the early signs of post summer holiday market activity are looking encouraging. Over recent weeks we have seen a significant uplift in prime off-market opportunities as sellers test the market, which usually indicates an uplift in autumn listings. It appears that people are getting used to this new reality and preparing to take advantage of it – after all, if you can buy well then why not take a pragmatic view on the value of your existing home?
A Tale of 20 Cities
The UK Cities House Price Index produced by Hometrack provides a useful concise ‘state of the nation’ view of the property market, focusing on just 20 cities throughout the UK. Given just how far ahead price inflation was outstripping wage inflation it comes as no surprise that London, Cambridge and Oxford, which have seen 50-60% growth since 2007, are now seeing prices either flat-lining or falling relative to inflation. Similarly, it is no surprise that Manchester, Leeds and Nottingham, which have seen minimal growth in recent years, are now recording 5-6% year on year rises in average house price values.
Currently the fastest house price growth is in Birmingham, up 7.8% already this year, but the absolute stand out location must be Bristol; which is up 5.6% year on year, despite average prices being nearly 40% up since 2007.
Stamp Duty driving behavioural change
Despite the series of political and economic events that have shaken market confidence over recent years, undeniably the issue which has changed market dynamics the most is the revision to Stamp Duty made by George Osborne.
It doesn’t matter how wealthy you are there comes a certain point at which something just becomes too expensive relative to its actual benefit and starts to look punitive. At this point people change their behaviour by either looking at other products or finding a way to circumvent the cost. Put succinctly, this appears to be exactly what is happening in parts of the prime market, and due to its higher values, disproportionately so in Prime Central London.
LonRes cite the example of a man who goes into an agent and asks for a luxury family house that he can rent for two years, with immediate occupation. A week later he rents a house for £25,000 per week (£1.3m per year). Had he bought the property as a second home then the SDLT would have been about £5,150,000, but in 2014 the tax would have been £2,310,000 – a difference of £2,840,000! For certain groups of buyers who plan to own homes for a limited amount of time, high value rentals offer a financially compelling proposition and Garrington is being approached by a growing number of clients with this type of request.
In most countries tax is a by-product of purchasing a property. It shouldn’t become the primary focus and a deterrent in the way that SDLT has now evolved. A study by the London School of Economics and the VATT Institute for Economic Research concluded that ‘transfer taxes on residential properties are an inefficient way of collecting tax revenue’ and suggests ‘levies on land consumption that apply independently of whether a household moves may be better’.
Looking beyond the summer, pressure is mounting on the Chancellor to take serious note as he plans his Autumn Statement, because the fall in transactions will inevitably result in a substantial fall in tax receipts despite the extra charges.