While the world remains concerned about recent developments in China’s rollercoaster stock market and Europe worries about Greece, the UK housing market continues to remain broadly stable, with some areas continuing to witness strong property price growth. But despite its safe haven reputation, the capital’s property market is not immune to the world’s economic woes.
The Greek debt crisis is of particular concern. Financial markets have recently been in turmoil over fears Greece would crash out of the Euro with unforeseeable and potentially shattering consequences. Although the country eventually secured a huge international bailout for its stricken economy, there are some analysts who still believe that a so-called ‘Grexit’ from the eurozone will eventually happen.
So far the UK housing market has remained largely unaffected by the goings on in Greece. This is thanks partly to the fact that the UK is not part of the eurozone and so is only providing a fraction of the assistance to Greece indirectly through its membership and contributions to the International Monetary Fund (IMF). Consequently, many experts believe that even if Greece did leave the eurozone, the UK’s housing market would remain largely unscathed.
In fact, a ‘Grexit’ may actually increase the attractiveness of the UK, with many more international investors drawn to London’s property market as they seek refuge from the global financial turmoil, which in turn may drive up house prices further.
Wealthy seek refuge in London
A study by the University of Oxford has found that turmoil in certain countries directly correlates with strong price growth in prime London areas as rich foreign buyers seek a safe haven for their cash. For over 20 years London property values have benefited from events overseas. Chinese, Middle Eastern and Russian buyers, who dominated before 2008, compete with Italians, Spaniards and Greeks in more recent years as wealthy southern Europeans hit by the financial crash buy safe assets. This goes a long way towards explaining why London property prices have surged at a disproportionate rate compared with the rest of the UK.
The latest data from the Land Registry reveals that London and the South East enjoyed the most significant annual price increase in the 12 months to May, jumping by 9.1% to £475,961, compared to a national average rise of 4.6% to £179,696.
Aside from high demand from wealthy international buyers, London’s housing market is also being propped up by growing domestic demand, which the National Association of Estate Agents (NAEA) says is now at an 11-year high, fuelled by greater political stability, a strengthening domestic economy, record-low mortgage borrowing rates, rising employment levels and government housing schemes such as Help to Buy.
“What we’re seeing is a market that lulled over the general election period, coming back to life in full force,” said the NAEA’s Mark Hayward. “There’s also an impetus to buy right now in light of the impending interest rate rise as buyers fight to buy and fix mortgage rates.”
But while demand increases, the supply of housing continues to plummet, with the Royal Institution of Chartered Surveyors (RICS) reporting that housing supply has tumbled to its lowest level since records began in 1978. “The fact that demand is at an eleven year high without the housing stock to fuel it, is bad news for the market,” added Hayward.This is expected to push house prices even higher, with RICS now projecting 25% growth over the next five years.
In an effort to prevent prices spiralling out of control, the Government wants to reduce the supply-demand imbalance by making it easier for developers to speed up the delivery of new homes as part of its Productivity Plan, which it recently announced. “I am not prepared to stand by when people who want to get on the housing ladder can’t do so,” said the Chancellor George Osborne.
Stewart Baseley of the Home Builders Federation has warmly welcomed the changes announced by the Government, insisting that “increasing build rates will provide people with decent housing and boost the economy”, while the Federation of Master Builders’ Brian Berry agreed that the Chancellor’s proposed planning amendments were a “major step towards solving the housing crisis”.
Other major housing-related announcements were made by the Chancellor in his recent budget statement, including the introduction of more stringent rules on non-doms which could contribute to a slowdown in house price inflation in prime central London. There were also changes to Inheritance Tax, allowing homeowners to benefit from an additional £175,000 allowance on top of the current £325,000 on a family home, which may have a negligible impact on the market.
However, the Chancellor’s decision to cut mortgage interest relief on buy-to-let homes so that from April 2017, mortgage interest tax relief for purchasers of buy-to-let homes will be restricted to the basic rate of income tax, currently at 20%, will have a major impact on the buy-to-let market.
Osborne’s aim is to create what he described as a “level playing field” between prospective landlords and those buying homes to live in, which along with the decision to abolish the Wear and Tear allowance for landlords, may discourage new investors from entering the buy-to-let sector, while others may now decide to sell up providing much needed housing stock.
“The fact that demand is at an eleven year high without the housing stock to fuel it, is bad news for the market,”
Should the move slow the buy-to-let sector, as some analysts now anticipate, it should also help to alleviate the Bank of England’s fears that the burgeoning buy-to-let market, which accounted for 15% of outstanding mortgages and 20% of new home loan lending in the first quarter of 2015, could pose a risk to financial stability in this country. It may also enable more first-time buyers, squeezed out by investor-driven purchasers, to get a foot on the housing ladder.
Conversely, there is a concern that some landlords may decide to increase rents to compensate for the loss in profit. Rents may then become unaffordable for many tenants, making it harder to save for the deposit needed to buy property. In fact, as a result of the tax changes announced by Osborne, some 65% of landlords are already now considering increasing rents, new research by the Residential Landlords Association (RLA) shows.
A glance at the existing state of the letting market shows that tenant demand continues to rise, pushing rental prices higher in the process. According to the latest HomeLet Rental Index, rents rose in all twelve UK regions in the three months to June 2015, led by London, where the average rent on a new tenancy now stands at a record high of £1,515 per month.
The bigger picture
The Government’s latest housing market intervention coupled with growing speculation that the Bank of England may finally start to increase interest rates by early 2016, will inevitably have an impact on the housing market, and may even cause activity levels to slow and prices to fall
“RICS [are now] now projecting a 25% growth over the next five years.”
in the short-term. But until there are enough homes to meet the needs of a growing and ageing population, the indications are that property prices will continueto rise in the medium to long-term. Not convinced? We will leave you with a number that should make you sit up and take notice: 1,000,000...
The forecasting body Oxford Economics recently predicted that the price of a home in the capital will continue to rise due to London’s growing economy and population, with prices reaching an average of £1 million by 2030. When you weigh up the various factors involved it’s an estimate that you’d be hard pushed to find anyone to disagree with, so perhaps, for the time being London property literally is, as safe as houses.
Keeping an eye on the market for the future. Sign up for our newsletter and wewill keep you up to date with all that's happening on the market.