UK Property Market Review 2016

UK housing figures

The total value of UK housing stock broke the £6 trillion mark for the first time by the end of 2016. When trying to gauge the health of the UK housing market its useful to look at several key figures.–

Home ownership – 2016 saw the lowest rates on record for UK home ownership at just 63.5%. This has fallen from 64.4% on the previous year and from an all time high of 73.3% in 2007. This figure is recorded annually but forecasts for 2017 are demonstrating a further decline. There are several reasons for this continued fall in home ownership : the continued shortage in new housing stock ; an ageing population occupying homes for longer than before ; prohibitive house prices in comparison to wages and credit or mortgages available on the market. All these factors combined are creating a perfect storm denying many the opportunity to enter the housing market.

New home construction rates – house starts in 2016 were 151850 units. This figure is up by some 8000 units on the 2015 figure of 143830 units. There does appear to be a gradual up turn in new house building productivity after years of sluggish construction, however the up turn will need to be sustained for some time to make any significant impact on the demands of the market as a whole. Current estimates cite a 500’000 unit shortage in homes across the UK.

Mortgage approvals – mortgage approvals for Q1 2017 declined slightly, down about 2% over the 3 months with an average of 67.84% approval rate. This is actually up slightly on the previous quarter of Q4 2016 which was 67.31%. This slight increase could be attributed to the additional new housing stock aswell as the materialisation of continued government incentives like ‘help to buy’. The latest decline however, for the start of 2017 could well be an anomaly attributed to the UK political situation. Article 50 triggered in March, local elections at the start of May and general elections announced in June could be giving financial markets cause for pause while the situation settles down, this would manifest itself as a tightening in lending policy to reduce financial institutions exposure to possible turbulence.

House prices – The latest UK average house price is £217,502. This is an increase by an average 0.35% on the previous quarter and a 3.8% increase year on year. This is the smallest increase in prices seen since May 2013, following a general consensus that the UK housing market is cooling. House prices in the UK should always viewed as two separate entities, the London market and the rest of the UK. London house prices are actually continuing to decline while the increase outside London is closer to 5%. A big factor in falling house prices in London is the exodus of foreign investors that have been artificially inflating the market for several decades. Conversely many of these investors are looking to alternative UK cities to invest their funds, applying an upward pressure to house and property prices outside of the capital.

UK commercial property figures

Commercial property is defined by any property utilised for the provision of jobs. This includes shops or retail space, industry and manufacturing, service and office space. Key figures worth noting for the analysis of the UK commercial property sector are as follows :

Total asset value of UK commercial property – the latest figures are £871 billion for the end of 2015 (this data is only complied annually, 2016 figures are still awaiting publication). This is the highest valuation to date for UK commercial property and makes up 13% of the overall UK built environment.

Level of investor activity in the UK commercial property sector – Investor activity in UK commercial property is currently in a state of flux. Investors are looking further a field than the capital for good opportunities but there has also been significant continued movement in 2016 on ‘who’ has been investing in the UK commercial property sector. Traditional UK institutions such as insurance and pension funds have been moving away from the UK with a drop of 10% over the last decade, where as overseas investors have increase by 125% over the same decade. What are described as ‘collective investment schemes’ are also up by 64% for the decade, this includes crowd funding platforms, Proptech & Fintech. There was a significant drop of 18% in investor activity around the Brexit vote however this has all but bounced back. So investor activity remains very strong in the UK throughout a changing investor landscape.

Key note commercial investments

The HS2 (High Speed Rail 2) – the HS2 finally passed its last major legislative hurdle in February of 2017. This huge UK infrastructure project is estimated to cost £60 billion but could run up to as much £100 billion by the time both phases are completed in 2033. The keynote contracts have now gone out to tender. This includes not just train, rail and cable contracts but also contracts for station construction in Manchester, Birmingham, Liverpool, Glasgow and Edinburgh. There is reportedly significant interest in these tenders from both UK and foreign investors for not just the construction but also the facility management and operation.

Crossrail 2 – Crossrail 2 is an extension of Crossrail 1 designed to bring the South West and North East of London together. The rail link is estimated to cost £30 billion but could also generate up to 200 thousand new homes along the route. The infrastructure project is still going through the funding and legislative motions and has not yet been finalised.

The Verdict

Home ownership has continued to stagnate and decline slightly in 2016 as private house rents are now significantly higher than a comparable mortgages, exacerbating the situation further, smothering the positive effects of the ‘help to buy’ initiative. There continues to be wide-spread speculation and stalling in the new house building sector, however there are signs that levy could be close to bursting, which would release a substantial upturn in new build activity. Mortgage approvals remain stable as some are able to obtain the required deposits for a house purchase though ‘help to buy’, altougth this is countered by the politically uncertain situation in the UK and some key indicators are now showing consumer debt over reaching to potential unsustainable levels. House prices are continuing to cool but rise marginly. Given the consistent upward demand in the UK housing its to see how house prices will fall significantly without a massive unpredicted shock to the economy (like a global recesion), so outlook is stable despite the uncertainty of Brexit.

Commercial property looks robust across the UK in 2016 making up a significant slice of the UK property portfolio. Although there has been movement in investor type in commercial property these voids seem to have been quickly filled with new technology platforms and hungry investors looking further a field than traditional the high street bank investments. There are also a number of major infrastructure investments and large developments in the pipe line across the UK with plenty of interest from investors.

So with the exception of the Brexit blip in June 2016 both housing and commercial investment sectors remain strong with plenty to be positive about for the future. Brexit remains the big unknown especially around the operations and future locations of the UK financial sector which could affect property though contagion, however with investments still so attractive in the UK despite head winds it’s difficult to see any major exodus happening post Brexit but it remains to be seen.

 

Is Brexit going to make us all homeless ?

If I could accurately predict the precise affects of the United Kingdom leaving the European Union (EU) I would not only be a very rich man but undoubtedly a man in great demand. Not even the most learned academics on the planet truly know what the UK’s Brexit negotiations will ultimately lead too, but that’s why it’s exiting, no ?

So in all seriousness the idea of this blog is bring together a collection of credible sources, information and data in an attempt to lay out some possible effects and changes Brexit may have on the UK property market. This endeavor is even more of challenge at this time as the UK prime minister Teresa May has just announced, in the last few days, a ‘snap’ general election to be held on the 8th of June. This means UK politicians are now in campaign mode, and not everything in an election campaign is necessarily rooted in the unbridled truth, but I shall try my best, never the less. This is also in light of several European elections including France and Germany to take place over the coming weeks and months.

One of the UK’s known strategies for the transferral of legislation from the EU to the UK is known as the ‘Great Repeal Bill’. This simply stipulates that all relevant EU legislation will be transferred at the stroke of a pen to be sifted through and reconstructed at the UK parliaments leisure. I’m not entirely convinced with the ‘simplicity’. This is an institution that the UK has been increasing intertwined with for over 40 years and even if the transferral of legislation is that easy, there are also physical disconnects and un-plugs that will need careful and considered management to avoid causing untold damage to either side of the negotiating table. Including areas that could affect the robustness of the UK property market.

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Is the EU institution involved in the UK housing market ? If so how ?

The short answer to this question is no, at least not directly. However there could be an argument made that the EU do regulate, at least in part some peripheries of the UK property market. One example being, what are known as securitisations. Securitisations are banded together and repackaged mortgages which are then traded by 3rd parties as entirely new financial transactions. These securitisations can make up what is commonly refered to as a Government Bond which are then traded on the International Bond Market. This is basically one way a country raises money (in the form of debt exchange) when it needs to raise capital beyond its domestic income (taxes). Now, largely speaking the origin country is usually expected to regulated their own bond offerings to the bond market (poor regulation could lead to poor bonds and a country damaging its own credit score and ability to raise money in the future, so it’s in the countries own interest to make sure what they are offing is credible and well-regulated). The UK’s regulator is the Financial Conduct Authority (FCA). So where does the EU come in to play ?

In 2010 at the Pittsburg G20 the European Central Bank (ECB) along with its international partners agreed to accelerate the ECB’s regulatory program for international monetary markets in response to the 2008 financial crisis (ECB Source). While this program is significant with particular focus towards clamping down on fiscal misconduct and the lack of best practice polices, widely seen as a substantial contributor to the financial crisis, any EU centralised regulation or unintended negative consequences of specific regulation is, and can be, at least in the large part buffeted by the fact the UK is not part of Euro currency. For example the Bank Of England have fiscal tools at their disposal to migrate or reduce any potential damage to the UK economy. So to come back to the specifics of the UK housing market in respect to the trade of mortgage securitisations on the international market, yes EU regulation could potently effect the UK’s effectiveness for such bond sales, which in turn could effect the wider UK housing market through the availability or cost of mortgages. However the UK’s bond market is largely the UK’s responsibility and given the interconnected nature of such international markets in 2017 it seems foolish to belive that EU would ever want pursue a punitive policy against the UK designed to cause damage to the UK economy or the property market as it would very likely damage the EU at the same time, and though contagion could well ignite another global financial crisis.

The second area that needs examination would be the specifics around property and land ownership. Having spent some time searching through the EU’s online archive of available literature I have been unable to find anything that specially relates to legislation around the ownership of property in either member states or soon to be former member states. There are plenty of 3rd party research papers and analysis for most of the countries of EU (including the UK) on this subject but they stop short of being a representative view of the EU institution, in fact most of them specifically state that they are independent and non representative. So I’m afraid on this one we are going to have to venture a little way down the long and winding road of hypotheticals. It has long been a stated ambition of the EU to desire ‘ever closer political union’. One of the most fundamental tenants of any political establishment is the ‘ownership of property/wealth’. There is a remarkable amount of research conduced on behalf of EU on this subject but yet there is no concrete legislation. One might well deduce that legislation could be in the pipe line (post Brexit), but it’s equally viable that the EU intend to keep property ownership and its accompanying legislation, devolved to its constituent states (countries). After all property ownership and rights often date back century’s and vary massively from country to country. So as it stands the EU has no legislation (as far as I can find) on this subject so I think the UK’s house’s and the rest of EU’s members house’s are not about to be repossessed, thank goodness.

Whats the current state of foreign investment in the UK property market ?

This is largely an unpredicted consequence of the June 23rd 2016 referendum result or at least an under reported consequence, it’s also a story of two half’s. On the 18th of March this year The Telegraph published an article highlighting the recent flurry of foreign investment in to the UK. This includes a £563m purchase of an office park near Reading, a Liverpool shopping centre for £300m and a £400m redevelopment in Edinburgh. What do all these investments have in common ? They are all outside of London, in fact the investors in the Reading Office park also sold its stake in the ‘Cheese Grater’ building located in the heart of London. The lack of London-based property investments on crowd funding platforms such as Lendy, Funding Circle and Collateral are also noticeable in their absence.

There are multiple factors at play currently creating this situation, the devaluation in stirling being a significant one. A foreign investor buying in either American dollars or a currency pegged to the dollar can enjoy an average of a 10% effective discount (based on pre referendum exchange rates) due to the drop in stirling, if that 10% recovers in due course an investor could make millions in profit on a large investment for nothing more than their patience, a very attractive opportunity indeed. There are also regional factors at play, such as the confirmed development of the HS2 rail line, The Midlands Engine growth fund and The Northern Powerhouse growth fund.

London’s problems have been a long time coming. Excessive, unchecked foreign investment in to the capital over 20 years has resulted in hyper-inflation of property prices, the large-scale gentrification of whole postcodes and a bubble that looks fit to burst. The smart money seems to leaving London at a pace and its difficult to see how London will get out this one without enduring significant pain. You know what they say ‘what goes up must come down’ and London has gone up very high.

Domestic consumer confidence.

When talking about economics it doesn’t take long for the term ‘consumer confidence’ to come up. Consumer confidence is more of a temperature gauge, a feeling or a prediction of the health or potential growth of an economy at large, rather than a cold hard fact or data. So it’s not an exact science but it’s still a useful indicator of what the future might hold in terms of growth and economic health. For the purposes of this blog I’m going to try to focus in on consumer confidence specifically related to the property market, but lets start with overall picture of UK consumer confidence. The latest figures for consumer confidence (based on the Consumer Price Index (CPI)) show a figure of minus 6 points for the month of March 2017. This has been fairly stable since November 2016. The biggest movement in this measure in the last 12 months was July 2016 following the UK referendum result where it dropped to minus 12 but bounced back rapidly the following month to just minus 1. In the last 10 years only 2015 has shown positive measures with 2008 setting records for negative measures, bottoming out at huge, minus 39 points in July of 2008. So what does this figure actually mean ? In essence its rolling total for most (some minor specific transactions are excluded such as those bases around criminality) of all the transactions taking place within the UK economy. So the latest figures for March 2017 state that the sum of all the transactions taking place inside the UK were 6% lower in value based on the previous years comparable month, so show a retractation in economic activity as a whole. There needs to be caveat applied here in terms of current reduced rate of Stirling, meaning foreign investment is actually at a monetary lower value, which in turn is applying downward pressure on the overall consumer confidence figure, although even with this anomaly extrapolated economic activity is still down, slightly.

So lets look at the picture in specific relation to the UK property market. One reputable index used by a large part of the industry is the Ipsos MORI Halifax Housing Market Confidence Tracker. This is a consumer survey given to Halifax customers when conducting property transactions. Its based on a number of questions around confidence and opinion of the consumer most of which are framed ‘in 12 month’s time’ predictions. One of questions asked in the survey is as follows –

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As you can see the overwhelming response to question of house price levels is a moderate increase over the next 12 months. This is in line with a general consensus of marginal increases in-house prices in 2017 leading to potential stability in late 2017 early 2018, reported by The Guardian, the BBC, This Is Money, and Barton Wyatt. Figures for London are bucking the trend with a slower than UK average increase in prices with some areas actually falling as the London market continues to overheat and burnout.

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The chart above (taken from the same Ipsos MORI survey) also shows the prediction for a moderate increase of house prices, but the blue line shows responses to future confidence in the state of the UK economy as a whole. As you can see a majority of participants are lacking confidence in the strength of the wider UK economy. Now this is interesting because logic might indicate a weakening economy would lead to a drop in house prices or demand for houses. So why does this not appear to be the case ? Well the UK hosing market has always been particularly resilient even when the wider economy is cooling or retracting. Part of this discrepancy could also be down cynical media reporting, everybody is told the economy will suffer post Brexit but reality so far is not supporting that theory, although that could change once Brexit negotiations are completed. Along with this there are very limited investment and saving options for UK consumer right now with record low interest rates, making property still an attractive proposition.  So with the exception of the London area consumer confidence in the UK housing market still seems to be resistant.

The wider European landscape.

Its worth considering the wider European situation from an investors point of view aswell. Europe, or more specially Western Europe has been seen as an attractive place for Middle Eastern and Asian investors for some time. There is no denying the UK is in a state of political flux right now, but looking at the alternatives in Western Europe, both Italy and Spain have considerable unemployment problems at 11.5% and 18.6% respectively although they are slowly coming down. France currently has unemployment of 10% but that is gradually increasing. Germany has an impressive sustained unemployment rate at just 3.9% however economic growth is very sluggish at just 0.4%. That being the case for most of Central and Western Europe, Eastern Europe generally has strong growth but lacks the investment infrastructure and security seen in the West. As for the UK, it’s on course for 2% growth in GDP with an unemployment rate of just 4.7%.

The verdict ?

So to conclude my humble analysis of how safe the UK property market currently is. I would say right now its in pretty rude health. The UK is quite insulated from European market pressures because we have an alternative currency with full autonomy. There doesn’t appear to be any major regulatory obstacles to over come in respect to the property market in the Brexit negotiations. Foreign investment and interest in investments across the country (excluding London) in both the public and private sector seems to be strong, with support from regional growth funds. Domestic consumer confidence has taken a hit but this is often short-term and driven by speculation not facts (people who need a house will still need to buy a house even if they put it off for 6 months). UK unemployment is at the lowest rate since 1977 and growth is moderate despite the prevailing political and economic head winds. But of course it could all turn a 6 pence, so enjoy the ride.

How are the new Stamp Duty changes (April 2016) effecting the UK housing market ?

What are the changes in Stamp Duty ?

As of April 1st 2016 considerable changes in payable Stamp Duty (SDLT) were introduced by the conservative government in the UK (excluding Scotland) when buying a second home. So for example if you purchase a second home on a free hold for £150,000 that you do not intend to occupy yourself the SDLT due on that property would be £5000 after April 1st 2016. Previous to this date the SDLT due would have been £500. If the property is £300,000 the SDLT due would be £14000 where as it would have been just £5000 prior to the April 2016 changes. (calculate your SDLT here). In essence 3% has been added to the Stamp Duty percentage for each ‘slice’ of property values (over £40,000). So as you can see the changes are significant to 2nd home owners or buyers.

Why were these changes introduced in to the UK housing market ?

Well quite simply the UK housing market has been overheating for some years now driven by a number of factors. A shortage of housing supply due to both lackluster new house building and a growing population. Speculative investors ie. investors buying up housing stock in the hope that prices will increase so they can sell the property on for a profit, this problem is particularly acute in London with overseas buyers dominating the higher end of the market distorting prices even further. A lack of alternatives for investors and savers. With Bank Of England interest rates remaining at record low rates traditional investments and saving options are just not attractive options for most people. Finally the ‘buy to let’ market, more homes in the UK in 2017 are now rented than ever before and while this may indicate that it is more cost-effective to rent rather than buy your 1st property this is often not the case with rents actually being higher than a mortgage on the same property, applying further upward pressure on house prices overall.

The April 2016 increases are an extension to George Osbourne’s (Chancellor Of The Exchequer) 2014 Stamp Duty reforms that fundamentally changed how Stamp Duty was charged on all properties. From a ‘slab’ format where the percentage for the corresponding threshold was applied to the whole value of the property to a ‘slice’ format where graduating percentage rates are applied to each slice of the value of the property according to the threshold parameters. Osbourne’s changes were strongly criticised by a report at the end of 2016 by Oxford Economics claiming they were causing damage to the housing market, job losses and a loss of tax revenue, which lead to campaign by The Telegraph to get the reforms over turned. However the report only focuses on properties valued over £1,000,000 most of which are in the London area. The report seemed not make much of an impression as Philip Hammond (Chancellor Of The Exchequer) decided to build on the reforms with April 2016 increases.

So how did this change effect the UK housing market ?

Many predicted a surge in housing sales and purchases ahead of this change to avoid the additional charges and the table below seems to support that prediction –

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Table shows Office For National Statistics data for property sales volume between Q1-2015 – Q3-2016

You can clearly see a significant spike in sales in Q1 – 2016 of 68,853 sales compared to the previous quarter across England and Wales, however a caveat should be applied to these figures. Q1 of any year tends to be the more popular time of year to buy and sell a house but even with that caveat extrapolated there is still a significant upturn in sales. Whats more stark however are the following figures for Q2-2016 and Q3-2016. The sales volume does drop back but not as far as the comparable previous years figures, suggesting that the increase in Stamp Duty, designed to cool the market has not worked. In fact right up to latest figures ending December 2016 all measures including sales volume and property prices appear stable. So in conclusion the robust UK housing market as a whole seems to have taken the Stamp Duty changes in its stride, at least for now.

What is PropTech ?

PropTech is short for Property Technology. This term casts a wide net over a number of areas but can defined by any technology developed to assist in the purchase, leasing or marketing of property. With-in the PropTech sector a number of platforms have sprung up in recent years allowing the small fish investor (like me) to easily invest small amounts in property transactions in exchange for a reasonable return. We all know UK banks are currently delivering pitiful returns on savings accounts at this time so its good to know there are alternatives.

Of course its has to be said any money invested in these platforms is at risk like any other investment, so be aware you can walk away with less than you started with if a borrower hits choppy waters and starts to default on repayments. I would suggest reading as much as possible on your chosen platform and more generally about the sector so your eyes are open before making any commitments.