Taking off again in 2019

For the immediate future, the low number of transactions will be holding house price inflation down, creating the expectation that house price growth will remain subdued at 4.1% into 2018 before taking off again in 2019.

The factors currently taking the steam out of the market are primarily due to government regulation, which includes the rise in stamp duty on second homes and the changes in buy-to-let mortgage tax relief.

Real income growth is being eroded by higher inflation, as the effects of the vote to leave the European Union are now being felt by households. The biggest downside risk to the UK housing market is a slowdown in consumer spending and a potential blow to consumer confidence.

Lower interest rates

Activity in the mortgage market has been sustained by the accommodative policy stance of the Bank of England which lowered interest rates by 25 basis points in August last year, resulting in lower borrowing costs.

UK house prices will growing by just 4.4% in 2017, which is the slowest rate since 2013, according to new forecasts by leading economics consultancy Cebr – the Centre for Economics and Business Research. Being part of the consultancy’s Housing Prospects publication, this forecast, sees growth at below 5% for the next two years, after which activity in the housing market is expected to pick up again.

A leading indicator for property transactions, mortgage approval numbers, have recovered from their mid-2016 low and remain on a stable level of close to, but just under 70,000 per month. Compared to the historical average, while this is a low figure, it is near the post-crisis high of 74,000 seen in early 2014.

Foreign demand
With the continuing shortage of suitable housing exerting pressure on property prices – more than 40% of local planning authorities do not know how to meet local housing demand over the next ten years according to the government’s housing white paper. Due to the low value of sterling, those at the higher end of the market, who are looking to sell can hope to benefit from a pick-up in foreign demand.  

Reduction in private buy-to-let landlords

Kay Daniel Neufeld, Economist at the Centre for Economics and Business Research, commented:
“Additionally, the government’s changes to the buy-to-let sector are about to swing into high gear as private BTL investors will no longer be able to fully deduct mortgage interest payments from their tax bill. Starting next month, the government mandates that only 75% of taxes on mortgage interest payments can be deducted at the full rate of 40% while the remaining 25% will be deducted at a lower rate of 20%. Over the coming years, the tax system further reduces the share of pre-tax profits that can be deducted at the higher rate until in 2020 all pre-tax profits can only be deducted at a rate of 20%, essentially shifting the tax base from profits to rental income. This means that for the higher rate paying landlord the applicable tax deduction shrinks by 50% resulting in substantially lower net profits. Cebr expects this shift in the tax regime to significantly reduce the number of private buy-to-let landlords in the market.”

Leaving the European Union

Impacting on consumers’ disposable incomes will be a combination of rising inflation and stagnating wage growth, which will lead to a halt in real income growth. This downside will put a slight dampener on housing demand in 2017 and 2018. The property market is still reeling from additional taxes, which the previous government implemented at a time when they were not expecting that the UK would find itself preparing to leave the European Union.

The most expensive boroughs
Westminster and Kensington & Chelsea remain the most expensive boroughs. The capital’s more affordable boroughs also record strong growth with London house prices now nearly 12 times average earnings.The steepest growth in house prices in the capital over the past 20 years have been recorded in the North East London Borough of Hackney. Private housing stock in London is now worth £1.27 trillion according to new research by Lloyds Bank.

Shooting up the list by 16 places
Shooting up the list of house price increases for London boroughs, by 16 places, from 28th in 1996 to 12th in 2016, is Hackney. The average house price in Hackney has increased by 702% to £606,269 in 2016, from £75,569 in 1996, an increase of £530,700. This compares to the average increase of almost 450% for London and 290% in England and Wales over the same period.

The next largest increase in average prices over the past 20 years are homes in Westminster, which have seen a rise from £190,438 (1996) to £1,424,388 (2016) – an increase of 648% – followed by Southwark with an increase of 626%.

The report also reveals that prices in London’s more affordable boroughs, have also recorded strong price growth. Moving to one of the top five performing areas are Waltham Forest (617%) and Newham (612%), who were among the six least expensive boroughs in 1996. Whats boosted house prices in these areas is the Olympic regeneration programme and improved travel links via the Jubilee Line extension (1999) and previously the Dockland Light Railway (1987).

Price gap widens across England and Wales
The gap in average house prices between London and the average for England and Wales, over the past 20 years, has widened from a difference of £33,834 (or 47%) in 1996 to £299,631 (or 107%) in 2016. London’s ‘Prime’ boroughs – City of Westminster, Kensington & Chelsea, and the City of London, having pulled even further apart. Prices are now 5.72 times the England and Wales average. This compares to 3.34 times in 1996.

Also seeing a surge is the total value of private housing stock in London. In 1996 it was £201.8 billion, rising (529%) in 2016 to £1.27 trillion, an increase of nearly six and a half fold.

Boom years
Lloyds Bank Mortgage Director, Andrew Mason, commented: “The last 20 years have seen substantial growth in house prices in London, especially in the most affluent areas of the City. The boom years between 1996 and 2008 saw the gap widening between house prices at the top end of the market and those in London’s inner and outer boroughs, creating two distinct markets1 – ‘Prime’ and ‘Mainstream’.

“However, whilst those boroughs at the top end have pulled away considerably from the rest of London and the country in terms of house prices, improved transport links to the city from the outer boroughs and the 2012 Olympic Games has meant that the boroughs directly benefitting from these have seen house price growth outpace the Prime areas in recent years.”

The best performers
20 boroughs have seen average house prices increase by over £400,000 between 1996 and 2016, the largest increase in monetary value has been seen in Kensington and Chelsea, where the average house price has grown from £297,768 to £1,857,287 – an increase of £1,559,518 (524%) and equivalent of £6,498 per month. Westminster is the next best performer, where the average value has grown by £1,233,949, followed by Camden (£887,658). Over the past 20 years these three boroughs, along with Fulham and Hammersmith have consistently been London’s five most expensive areas.

In 1996, average house prices were under £100,000 across nearly two thirds (64%) of London’s boroughs – fast forward 20 years and average prices are now more than £500,000 for over half (58%).

Compared to 1996, the ten most expensive places to live in London remain largely unchanged. The key exceptions are Southwark, which has moved up ten places to ninth spot and Haringey which moved up two places to tenth. Dropping out of the top ten are Barnet and Kingston-upon-Thames.

The biggest movers
Bromley in Greater London has fallen most in the league table, dropping seven places from 14th in 1996 to 21st in 2016, whilst Hackney is the biggest climber on the list,.

London house prices are now nearly 12 times average earnings

In 1996, the average price to earnings ratio in the capital was 3.9. This had risen to 11.6 in 2016.
All of this means that average earnings in London have failed to keep pace with the rise in house prices over the past 20 years.

Camden remains the least affordable borough both 20 years ago and today, with a ratio house price to average earnings of 6.2 in 1996 and 20.0 in 2016. Bexley was the most affordable borough in 2016 (7.4) followed by Havering (7.7).