Market Report – Outlook 2013

Market Outlook

The market outlook for 2013 is healthier than it has been in recent years, with an unusually brisk end to 2012 bringing several surprises.

HMRC data recorded that property transaction volumes to the end of November had increased by a modest 2%. Halifax suggested that house prices had risen in December by an unseasonal 1.3% and were up 0.6% against the previous quarter. However, Hometrack and Nationwide reported that prices had fallen in December by 0.1% and for the year by 0.3% and 1% respectively, although Hometrack also reported a 20% rise in the number of regions in the UK recording price rises in 2012, as seen in the graph below.

Economic factors

Whilst the FTSE is looking stronger, the overall UK economy remains fragile and the Governor of the Bank of England has forecast a ‘zigzag’ pattern of growth this year, which is likely to result in a continuation of the historically low base rate. The ‘Funding for Lending’ scheme is starting to impact the credit markets, and buyers are likely to be able to benefit from increasingly competitive mortgage rates.

Inflation now stands at 2.7% and is principally being driven by rising energy and utility costs. This has a direct effect on the housing market because of its impact on disposable income. Affordability remains key to sentiment, and as seen in the graph below, the house price to earnings ratio of 4.39 is still above the long term average.

Sterling may face challenges from a recovering US dollar and any fall will have inflationary consequences, but conversely may entice further interest from international buyers.

Clarity and confidence

The year ahead presents fewer obstacles to a sustained increase in market activity. Events such as the Olympics and Jubilee celebrations may have been good for GDP, but arguably could have been the cause of a faltering market in key months of last year.

December’s Draft Finance Bill brought some long awaited clarity on the issue of the ‘Mansion Tax’ and offshore tax structures for ‘non-natural’ persons. An Annual Residential Property Tax (ARPT) is being implemented as a banded levy on property owned by certain ‘non-natural’ persons – the amount due ranges from £15,000 to £140,000 depending on the value of the property. A CGT tax of 28% will also be payable by non-resident, ‘non-natural’ persons on any property gains made after April of this year.

Additionally the bill includes reliefs and exemptions to the ARPT and SDLT (otherwise set at 15% for properties over £2m) for genuine development and investment companies.

In light of these changes, Garrington expect to see demand waning for properties around the threshold value, and a potential increase in the supply of top end rental properties being fuelled by tax and ownership restructuring.

At the very top of the market Garrington predict that ‘Super Prime’ buyers will absorb the ARPT as an additional ownership cost, and therefore it is unlikely to have a profound effect on volumes and values in this sector.

Whilst caution remains across the market, 2013 shows signs of a positive start. Research released by Halifax records that nearly 4 in 10 sentiment survey respondents believe prices will rise in 2013 – the highest positive sentiment level since April 2011.

Investors to remain active

Property investors look set to remain active in 2013. According to the CML, lenders advanced 100,000 buy-to-let mortgages in the first nine months of last year, up 15% on 2011. Rental demand is likely to continue to grow, with the ONS reporting a further fall in home ownership to 64% (from 68% in 2001).

An LSL survey of Landlords indicates an anticipated 4.6% growth in rental income in 2013, albeit ‘Super Prime’ letting agents recorded a fall of 1.3% in rental values in 2012, reflecting subdued employment prospects in The City, and increasing property supply in this sector of the market.

The bulls and the bears

At the start of each year there is inevitable debate as to the future direction of the market. On a positive note both Rightmove and the RICS are predicting a 2% rise in asking prices this year. RICS also project a 3% rise in sales volumes to 960,000 transactions in 2013. A more bearish outlook is predicted by Hometrack who suggest prices will fall by 1% this year.

Given the economic factors affecting the market, Garrington believe the mainstream UK market will remain relatively unchanged for the year ahead. Whilst growth is likely to remain subdued at the upper end of the market we believe that both London and Prime Country property values are likely to see gentle positive growth over the next twelve months.

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