18 May 2017
Property transactions are becoming rare events.
by Frank O’Nomics
Are house sellers starting to get desperate? We have not yet got to the stage of BOGOF (buy one get one free), but some developers have been offering iPads in return for early deposits, together with free cars on completion – as well as agreeing to cover the cost of stamp duty. Others have been offering furniture to the value of £20,000, John Lewis vouchers and travel cards. Cynics might be inclined to suggest that they are doing everything except reduce the asking price, which would risk uncovering the true nature of the market. One seller in Blackheath started selling raffle tickets at £5 each online for a chance to “win” his 5 bedroom house – the raffle was stopped on the basis that a lottery has to be run for a good cause (if they had made it a competition requiring some knowledge, skill or judgment they might have got away with it). There are also signs of desperation in the auction market – where last week 3 new builds had an estimate of £1.4m, compared to a £1.8m price tag when on an agent’s books.
Just what is going on? At the time of year when they are supposed to be at their busiest, estate agents and surveyors are reporting stagnant demand from buyers and a lack of instructions from sellers. This situation has been building for some time and a report from the Royal Institution of Chartered Surveyors last week showed the 14th consecutive month where their members reported an overall fall in the number of properties being put on the market. The number of buyer inquiries was also down, not having shown any meaningful growth since November. Countrywide, the largest network of residential agents has reported a 29% fall in like-for like sales and Cluttons, an estate agent in business since 1765, has succumbed to what appears to be a rescue takeover (although their problems are exacerbated by their pension deficit). In trying to decide what all this means for the price of property it is worth looking at the factors causing the continual slowdown in activity..
There seem to be two distinct drivers behind the malaise. First, increases in taxes on property transactions have had a pronounced impact. While the shift in the weight of stamp duty to make it a more progressive tax, so that purchasers of cheaper properties faced a lower rate, was intended to make it easier for people to get on the housing ladder, the impact has been to arrest transactions at the top of the chain as those buying properties for over £937,500 face an increase in total stamp duty. Further, much of the turnover at the cheaper end had previously been from the buy-to-let sector and the additional 3% tax that these buyers face, together with a steady reduction in the tax relief on their mortgages, has taken away much of the motivation to buy. Put simply, both ends of the chain have been undermined. Secondly, there appears to have been a marked change in people’s confidence about their economic circumstances. Selling a house to buy a more expensive one is a major financial commitment and, if you are not confident about sustaining or increasing your income, it is not a step you are likely to want to take. Inflation is starting to have an impact on disposable income and fears of an economic slowdown, given the uncertainty over Brexit, are not going to go away for some time.
There are additional worries for house builders who, as a sector, have done very well from the help to buy scheme. This initiative, launched in 2013, has seen £5.5bn pumped into new builds, but is due to run out in 2021. That sounds a long way off, but builders will have to begin considering the possibility of having to offer discounts to compensate for a lack of state assistance.
Those who still contend that house prices have further to rise will argue that cheap money continues to encourage buying, and this month HSBC offered its lowest ever 5 year mortgage, at just 1.69%;, and when Atom offered a 1.29% rate they had to close the offer quickly after being inundated with applications. Further, there does seem to be a reversal of the North-South divide – at least as far as the Midlands, where developments such as the HS2 railway hub and the government’s £392m investment in the “Midlands Engine” has meant that sales are still at record levels, with reports of some properties going to sealed bids. Nevertheless, there is a danger of a ripple effect from London and, overall, UK mortgage approvals are already at a 6-month low. Further, the rental market is signalling further weakness to come. Rents in London have fallen for the first time in eight years.
It is still not clear whether the lack of sellers will more than compensate for a decline in buying interest and hence keep house prices high. However, the pace of job creation is slowing and, at 7.6 times the average salary (which is over twice the multiple of 20 years ago), current prices are extremely high; especially when one factors in other household debt being close to ‘maxed out’. Perhaps we can look forward to yet more innovative measures to shift stock, and maybe even (finally) a buyer’s market.
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