The New Year has brought a level of cautious optimism back to the property market as hesitant buyers and sellers decide to put their moving plans into action.
A combination of upbeat economic data, and the general consensus that prices are unlikely to significantly fall this year, is supporting revived activity and is further compounded by recently released industry data which paints a picture of a fragile, yet recovering market across many parts of the UK.
Values and volumes
Data from Halifax records that national house prices rose by 2.5% in the final quarter of 2016 and, despite the market volatility seen last year, prices were 6.5% higher compared with the same quarter a year earlier. Nationwide also recorded a similar trend, reporting a 0.8% monthly rise in average house prices last month.
Whilst full year data is yet to be published for 2016, commentators expect annual sales volumes to be broadly unchanged from 2015 at around 1.2 million transactions. However, data released in December by the Land Registry for the third quarter of 2016 recorded a noticeable fall in London transactions year on year, which have fallen by 24%, and are down by 42% from two years ago when the graduated stamp duty structure was first introduced. This slowdown in sale volumes is mirrored with price movements and, for the first time in 8 years, price growth for London was below the UK average. London prices increased by 3.7%, which was down from 12.2% in 2015, highlighting that London’s outperformance has ended.
By contrast, the best performing region was East Anglia with price growth of 10.1% for the year. The North witnessed subdued price growth over the year, with many counties seeing under 1% price growth.
Building a solution
One of the main contributing factors supporting house price inflation is the ongoing chronic shortage of available property in certain price bands, particularly in the affordable mainstream sector. Following on from commitments made by the Chancellor in the Autumn Statement, the Government announced at the start of the year that a total of 48,000 homes are to be built within 14 new ‘garden village’ developments. Sites from Cornwall to Cumbria have been identified and these form part of the Government’s pledge to build 200,000 homes by 2020, a number of which can then be sold at discounts to qualifying first time buyers.
Whilst new building starts increased by 7.4% year on year in Q3 2016, output of new homes remains way behind demand, and the new initiative is unlikely to correct the supply demand imbalance any time soon.
The UK economy has remained remarkably resilient over the last 6 months since the June Referendum and the immediate risk posed by Brexit has declined according to the Governor of the Bank of England, Mark Carney. The Bank will publish its latest report on the economy next month, but the Governor has already suggested that there may be a further upgrade on its 2017 economic growth forecast, which has already been revised in November from 0.8% to 1.4% for the year ahead.
If accurate, this forecast bodes well for the property market which is intrinsically linked to economic factors such as employment, inward investment and the performance of financial markets.
Mind the gap
The average London house price is now £473,000, meaning that affordability has become a significant constraint. Indeed, according to Nationwide, a typical London buyer now has to be in the 90th income percentile to be able to afford to purchase a property. In Scotland and the North, a buyer only needs to be in the 30th income percentile, which illustrates a striking difference in affordability across the UK. This appears to be a strong factor in emerging figures illustrating a net migration away from the Capital.
Due to the tax changes affecting Buy-to-Let investors and an uncertainty over asset appreciation there is more focus on rental yield. As a result, this also appears to be driving interest in regional markets, with the biggest year-on-year increase in property transactions seen in Birmingham, Leeds, Leicester and Nottingham. The capital remains in demand too, but the formula for buying in the right location offering yield and capital growth has become more complex.
The average house price gap between Southern and Northern England currently stands at close to £175,000, up from under £75,000 in 2006 (Nationwide). With a softening market in London and the South East, coupled with the factors discussed above, 2017 looks like the year when the gap starts to close.