Market Comment

The housing market is continuing to benefit from the UK economic recovery, which appears to be on the right track, with property transactions and prices rising across many parts of the country. UK economic growth was recently confirmed at 0.7% for the final quarter (Q4) of 2013 compared to the previous three months and was up 2.7% on Q4 2012, giving Britain the best-performing economy among the G10 nations, according to the Office for National Statistics (ONS). “The underlying story remains one of an economy that performed surprisingly well over 2013,” said Howard Archer, Chief European and UK Economist for IHS Global.”

The improved economic outlook, supported by rising consumer confidence, falling unemployment and low interest rates, suggests that the economy should achieve the Bank of England’s 3.4% annual growth forecast for 2014, while also increasing demand for properties nationwide, driving up values in the process.

Two-tier housing market
The average price of a home in England and Wales was £170,000 in February, up 5.3% year-on-year, the latest Land Registry figures show, revealing wide regional differences between London and the rest of the country. While annual home prices actually declined 1.3% on average in north east England, values surged by 13.8% in the capital to £414,356, illustrating the widening two-speed housing market, with price growth in London outstripping the rest of the UK by a country mile. Despite this latest increase, property prices still remain over £11,000 below the average price peak recorded in November 2007, suggesting that there is even further room for property price appreciation.

Cheap mortgages fuel transactions
Just over one million homes were sold nationwide in 2013, according to HM Revenue and Customs figures, with some experts expecting the number of housing transactions to rise further this year, supported by historically low mortgage borrowing rates.There was a sharp increase in mortgage lending in February, with the latest data from the Council of Mortgage Lenders (CML) estimating that total gross mortgage lending reached £15.2 billion, up 43% compared to the £10.6 billion lent in the February 2013 – the highest total for a February since 2008. “Housing market indicators have continued to be strong over recent months, once seasonal factors have been taken into account,” said CML’s Chief Economist, Bob Pannell. Demand for low-cost mortgages is being supported partly by the Help to Buy scheme which enables purchasers to acquire property with a low deposit, from just 5%.

Capital growth
With recent housing market improvements attracting more buyers, from first-time purchasers to investors, the Office of Budget Responsibility (OBR) has revised its forecast for UK property price growth in the next five years from 27% to 30.8%.

According to the independent fiscal body, growth of 8.6% is anticipated in 2014-15, but will overtime slow down to 3.7% in 2018-19, respectively. Property price gains are expected to be fuelled by a widening supply-demand imbalance and less stringent mortgage lending conditions which is already pushing up property transactions.

Help to Buy
Help to Buy’s success since being introduced in April 2013 persuaded the Chancellor George Osborne to extend the Equity Loan element of the initiative, which is delivering around 2,500 new home reservations a month, until 2020, four years later than when it had been due to end. The move should further support demand from buyers, particularly first-time purchasers, for new homes.

The government says that sales of newly-built homes have soared by 29% since April 2013, thanks partly to Help to Buy, with 77% of homes purchased under the initiative located outside London and the south east.

New homes
The rise in demand from buyers has given developers the confidence to increase house building levels, with new housing starts rising by 23% year-on-year to 122,590 in 2013. “We are materially increasing the number of new homes we are building as a result of the continued recovery in the housing market across all regions,” said Mark Clare, Chief Executive of Barratt Homes.

The Home Builders Federation’s (HBF) latest Housing Pipeline report - a strong forward indicator of future levels of home building – shows that planning permission was granted for 52,534 new homes in Q4 2013, the highest quarterly total since Q1 2008. Some 174,471 planning permissions were granted in England last year, the highest annual figure since 2007 Furthermore, the Government believes that the recent extension of the Help to Buy initiative will support the construction of at least another 120,000 more new homes.

London’s Housing Strategy
Even with the rise in new build homes, there still remains a chronic shortage of properties, with experts estimating that around 250,000 new homes are needed annually to meet the growing demand. The shortage of homes is most acute in London, but the Mayor of London Boris Johnson is trying to address the issue. He recently updated his Housing Strategy, which will see up to 10 ‘housing zones’ created along with three garden suburbs, including sites at Barking Riverside, where building work is already underway, Beam Park in Dagenham and at Thamesmead. The document, published at the end of March, sets out a long-term ambition to boost the supply of new homes being developed in London annually to 42,000 over the next 20 years, including around 17,000 affordable homes and 5,000 purpose-built long-term market rent.

Private rental market
With attractive rental returns achievable, more people are now entering the private rental sector, as buy-to-let consolidates itself as the investment of choice, partly due to the dismal returns savers are currently receiving from banks and building societies. Rents in the UK have risen by nearly a tenth in the past 12 months to just over £750 per month, on average, led by gains in London. But even so these rents in London have struggled to keep up with house prices, with values in the city having appreciated five times faster than rents in the capital since 2005. House prices in London rose by 62% between January 2005 and December 2013, while rents increased by only 12% over the same period, the ONS said.

Whilst across England, prices increased by 26% on average over that period, compared to just 9% increase in rents. The ratio of prices to rents is important because the rental return on a property is a key long-run indicator of its fundamental value.

Rather than forecast a decline in property prices, most experts are projecting that values in London, which continue to operate in their own microclimate, will rise still further in the short to medium term, along with rents, as more people seek accommodation in the city and it continues to be on the radar of hot buyers from abroad.

Ripple effect
Historically, UK property prices have demonstrated a distinct spatial pattern over time, rising initially in a cyclical upswing in prime central London, then wider London and the south east, before spreading out nationwide. This is known as the ripple effect and can also be tracked from area to area through the suburbs of London. A glance at the property market suggests that history is repeating itself, with values soaring across many parts of the capital, and good quality property that is correctly priced currently flying off the shelves, with best and final offers occurring with increasing regularity.

The housing market in London has had a three-to-four-year head start on the road to recovery, and the reality is that other parts of the country are only just starting to catch up. Whether this dramatic increase in prices is evidence of a ‘bubble’ that can burst, or an easy way to sell newspapers is yet to be seen. What is more likely is a cooling of prices as the economy catches up and the added value filters out across the country.

Words:
Marc Da Silva
Property Market Specialist