London estate agents analyse the current market
Theresa May gambled on a ‘snap’ election, Brexit negotiations have remained a top concern, and we saw the first interest rate rise in 10 years – 2017 has certainly been an eventful year for the property market.
But despite economic and political uncertainty and a raft of new regulations, the London market has shown resilience, and house prices are up 8 per cent since last December*.
So what should we expect from the London property market next year?
2017: House prices stabilise as number of homes on the market falls
Falls in real wages and the economic and political uncertainty surrounding Britain’s upcoming departure from the EU has resulted in a sluggish property market this year.
The volume of sales transactions has declined 24 per cent year on year from July ’16 to July ’17 according to the latest Land Registry figures, and activity remains tentative.
So what does this mean for property prices?
Well, historically, volume has tended to lead price, with the financial crash of 2008 being a very recent example. Let’s take at how the current market compares to the market in 2008/9:
The pink line is sales volume, and the blue line is average property price. The graph shows that volume decline preceded price decline at the beginning of 2008, just as a recession hit the UK. Volumes fell drastically and prices plummeted by 16.2 per cent in the biggest drop for a calendar year on record. Interestingly, volume recovery then also preceded price recovery the following year.
Mark explains, “If we look at today’s market, the current transaction slowdown in central London is largely still a hangover from the change to stamp duty taxes two years ago, which saw an increase of stamp duty on properties over £1.1m.
Then, shortly afterwards, the introduction of the extra 3 per cent stamp duty charge for investors buying an additional home came into effect. This additional stamp duty explains the big jump in sales in the run-up to April last year, as investors rushed to purchase properties before the tax came into effect, and also explains the immediate fall.”
Volumes have been fairly consistently low since this fall, but they haven’t dropped sharply enough to lead prices like in the fall of 2008.
Why we’re not headed for a market crash…
In the run up to the financial crash of 2008, large UK property lenders were offering to lend as much as 125% of a property’s value to hopeful homebuyers. Then, when the economy turned, the UK faced a negative equity crisis as house price falls left thousands unable to move and stuck on high mortgage rates.
Mortgage lending completely collapsed – despite the Bank of England cutting interest rates by 0.5% to 4.5% in an attempt to boost bank lending – and there were just 300 or so mortgage products available on the market.
As a result, the few buyers that were in a position to proceed with home purchases delayed completing contracts or pulled out altogether, and transactions came to a complete standstill.
Homeowners are choosing to remortgage rather than move
“The difference today between today’s property market and the market at the time of the last financial crash in 2008, is that economically, people aren’t being backed into a corner – they have options.
“Wage growth continues to fall behind inflation due to the dramatic fall in the pound post Brexit, and affordability is stretched, but interest rates are low and home sellers aren’t being coerced to drop asking prices to sell.
So rather than accepting a lower price than they’d like for their property and forking out on moving costs and stamp duty, homeowners are choosing to remortgage to make what Instant Valuation they’ve got cheaper. And it’s low mortgage rates and a lack of housing that’s propping up house prices.
In fact, the only reason why property transaction volumes aren’t zero, is because people have to move because of lifestyle changes – getting married, starting a family, divorce, and death.”
We’re in a stalemate position, and we’ll likely remain in it for the next 12 – 24 months,” says Lawrinson.
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2018 Forecast: Prime central prices will continue to drop, the outer zones will thrive
So what do we predict for house prices in 2018?
After decades of runaway growth, we expect the prime central London market to follow the pattern of the past year as the graph shows, with prices continuing to level or slightly drop as the housing stock declines.
Mark Lawrinson explains why: “The demand pool has always been the smaller at high price points, and combined with the sharp hike in stamp duty, new obligations on non-domestic foreign buyers and political instability, it’s no surprise that less people are prepared to make big investments.
We don’t expect price falls to be sharp and drastic, more of a steady decline.”
A tale of two cities
However, London will be a tale of two cities next year, and the market will remain localised. We expect house prices in the outer boroughs of London to steadily increase, with certain areas performing particularly well.
Let’s take a look at how boroughs Newham and Haringey have performed this year:
As you can see from the graphs, green borough Haringey and Olympic borough Newham have recorded strong price growth in 2017 and this is a trend that we believe will continue into 2018. Mark Lawrinson reveals why:
“The Haringey Ladder is an area that has been overlooked and undervalued for years and has seen little gentrification, but it’s now following in Hackney’s rise to Hipster heights and emerging as a key property hotspot. It has a vibrant high street and is on the doorstep of large green spaces such as Finsbury Park and Alexandra Palace,” said Lawrinson.
Mark Lawrinson adds that there’s massive potential for property price growth in Haringey if the area undergoes investment in infrastructure: “If Crossrail 2 is given the green light, it’s very likely we’ll see significant change to this whole area, which will continue to push up house prices and rents significantly.”
Newham is another borough Mark Lawrinson tips for house price growth:
“London’s Olympic Games revived East London’s fortunes with huge-scale regeneration, which caused property and rent prices to soar. Stratford, in particular, bagged a gold medal in terms of investment in transport and infrastructure upgrades, and a huge number of people migrated to the area. A few years down the line, and people are beginning to push out to even more affordable areas, which have also benefitted from regeneration as a ripple effect.
Forest Gate has been an undervalued area, so prices here still have room to go up – unlike many areas in the capital. And as we tiptoe closer to 2018 when services on the Elizabeth Line will start the run, demand for property in the area will soar.”
If you need to sell, do so before 2019
Henry Pryor, the BBC’s favourite property expert, forecasts a sluggish 2018, with a lack of buyer demand in the months leading up to our departure from the EU.
If you need to sell for one reason or another, it’s therefore sensible to put your property on the market in early 2018:
“The quicksand in 2018 will be towards the end of the year, I suspect. Who is going to want to commit to their biggest single purchase in the six months leading up to our departure from the EU in May 2019? Many buyers will wait until the dust settles, and whilst there may be little practical difference having concluded our divorce, this may not be reflected in the housing market.
And make sure to use an agent!
Henry Pryor also advises sellers to not try and ‘go alone’ in a tougher market:
“Buyers will become bolder in 2018 and the most successful sellers will be those who listen to the advice of the best agents. Too many people will make the mistake of thinking that they can buy and sell on their own and get caught out. Even now, a third of homes on the market have had to reduce their asking price at least once, and over half of homes listed in swanky Mayfair and Belgravia has been in the market for over a year!
There is a market. There will be one in 2018 it just won’t be the same as the one we had a year ago.”
What about landlords?
Chris Norris, Head of Policy at the NLA, expects landlords’ costs to increase in 2018:
“We expect landlords’ costs to increase in 2018 mainly due to the tax changes, although the recent interest rate rise could also add an extra £20 a month to interest payments for every £100,000 of outstanding finance.
Rental property can still be a worthwhile investment in 2018, and we expect new landlords to continue to enter the market, but the increased taxation of the sector, the 3% stamp duty surcharge on additional property purchases, and potential further rises to interest rates means it will become increasingly difficult for anyone considering their first steps.
Because of those barriers, we’re expecting the buy-to-let market to become increasingly professional, with an increase in landlords switching to limited companies.”
However, Robert Nichols, Chief Executive Officer of Portico London estate agents, says there are plenty of clever ways landlords can cut costs and continue to generate a healthy return on investment:
“Location is imperative when choosing where to invest, and landlords need to drill into areas undergoing regeneration or investment on a street or postcode level to find the highest possible rental yields.
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Airbnb is an increasing popular short-term solution for landlords (there’s an annual limit of 90 days for London Hosts), who are utilising the site to a) synchronise their tenancy to begin in a busy season where they can command a higher rent and b) avoid void periods by putting their property on Airbnb until they find a long-term tenant.”
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*Data source: Land Registry Figures Taken on the website Nov17. Figures based on Greater London, 2016-2017.