25 January 2018
Flat prospects for house prices
Those worried about getting on the housing ladder should relax.
by Frank O’Nomics
Rod Stewart is struggling to sell his house. He knocked over half a million off the initial £7.5mn asking price in November, and a further £1mn more recently. This is not something that anyone other than Rod is likely to care about, and a million or two here or there is hardly likely to be an issue for him. However, Rod’s difficulties may illustrate one of the factors that could suppress UK house prices in general for some time to come. The ripple effect as falling house prices at the expensive end of the market wash down the property chain may not yet be discernable, but that does not mean that it won’t develop, and there are other factors bearing on the cheaper end of the market too.
The issue for Rod is the same as that for householders in many areas of London, where prices have been hit very hard, and the impact is felt on much more modest dwellings (the so-called “marzipan layer”). Stamp duty increases are seen as the cause but may have been the catalyst for a broader and deeper trend. Buyers of a property priced at £1.6 million now have to pay over £100,000 in tax, but the price corrections have been greater than this. Nearly half of the £1-2mn homes for sale in London have had their prices cut, with an average reduction of £142,000 and in some extreme cases as much as £900,000. You may think that southerners have had this coming to them and, with buyers now able to get twice the space for their money in 230 out of the 314 local authorities in the rest of England, all that may happen is that the price gap will narrow. However, the ripple develop down the chain and into the regions already seems to have started, with 1 in 3 sellers across the country reducing their asking prices last year. Only 25% of homes under £250,000 have seen price cuts, but this is still of significance.
The moderating momentum of prices at the lower end of the ladder may be down to uncertainty and worries about interest rates, but there are also signs that the market may have hit the limits of affordability. Overall, families are spending three times as much of their income on housing as they were fifty years ago, according to the Resolution Foundation. The proportion is at its most extreme for millennials (those born since 1981) who spend 23% of their income on mortgage interest, rent, council tax and home maintenance. Millennials are only half as likely to own a house at the age of 30 as baby boomers (those born between 1945 and 1965), and if you think that it doesn’t matter because they can all look forward to a big inheritance, think again – most millenials will not inherit until they are 61.
What about the buy-to let market, a key driver of the crucial two bedroom flat market for decades? Landlords in this sector face a rude awakening both in terms of financing and returns. Firstly, the additional 3% stamp duty imposed 2 years ago adds significantly to costs, but those who rushed to buy ahead of the move are likely to have done so using a 2-year fixed rate mortgage deal that is now due for renegotiation. Rates may not have moved much (yet) but the bigger difficultly comes with the tougher rules regarding such mortgages which may mean that borrowers will find it difficult to change lenders, or impossible to raise more money against the property. The other big factor that will hit returns is the continued phasing out of mortgage interest rate relief that started last year. By the time that this is complete in 2020, the National Landlords Association (NLA) estimates that it will reduce income on the average buy to let property by £850 per year. Clearly it depends why you own the property, but if you are one of the 30% of landlords who do so for income the justification is fading, with rents already under pressure – those in London having fallen in every month of last year. As for the 40% who claim to be in it just for the capital appreciation, once this becomes a fainter prospect they may look to sell and invest their money in something with better prospects. The NLA reports that 20% are looking to reduce the number of homes in their portfolio.
All of this leaves us with a market where the wealthy refuse to pay huge transaction costs, those less well heeled struggling to justify the costs and landlords starting to doubt the wisdom of buy to let. None of it means a significant deterioration in prices, particularly with a steady economy and high levels of employment, but the rush to buy that first property is abating. Fitch Ratings sees a flat house price outlook for the UK in 2018, with only Greece and Norway likely to fare worse. As for Mr. Stewart, given that his house comes with a full size football pitch, he may want to try marketing to some of the beneficiaries of the January transfer window.
