Where Have We Come From And Where Are We Heading? This Is The Question As We Near The Turn Of The Year
Activity, at the start of 2015, was quite varied. The lower end of the market had a boost from the Chancellor in the Autumn Statement of 2014 that, rightly or wrongly, was an ‘Election bribe’ and stimulated the market in this sector that, frankly, was doing very nicely beforehand.
At the same time, with the changes to Stamp Duty from 7% to 12% at the middle to higher end, this proved to be a real ‘passion cooler’. Transaction numbers in January and February were 43% down and values started to ease such that over the course of the year prices in London, in this sector, dropped by about 10% and are still falling.
Mansion Tax and the prospect of the return of a left wing Labour Party hung over sentiments like the ‘black death’ and only the bravest souls chose to commit themselves before the May Election.
The lower end of the market carried on regardless of the political machinations and growth in prices, in this sector, has been between 8-10% across the UK. This further disenfranchises the first time buyer that is the unforeseen consequence of this.
Most people expected a ‘hung’ parliament at best and the Centralists were delighted that there was a return of a Tory government with a small majority with a balanced political manifesto, mercifully, absent of the ‘politics of envy’ which was so rife within the Labour Party at the time.
Most pundits expected a ‘bounce’ in the market in May/June that, in the end, did not materialise at the middle and upper levels.
The Chancellor put paid to this with his Tax reforms in respect of Non-Doms aided and abetted by the drop in the world oil price and the gyration of the international equity markets.
London, ‘the greatest city on earth’, saw far fewer wealthy foreigners wanting to ‘splash the cash’ on UK property and, as such, transactions were vastly down.
The slow down in China and sanctions on Russians resulted in a drop in applications for visas from these resourceful countries of about 80%. Together they make up a significant part of international buying interest in this country.
Poor old ‘Johnny foreigner’ was being vilified for grabbing precious and scarce private housing that otherwise would be bought by the UK public. This is all the more odd since Berlin, Paris and New York would ‘give their right arm’ for this luxurious facility. Goodness knows what the additional 3% levy on Stamp Duty for Buy-to-Let investors and second-home buyers will do to market sentiments from the changes in the Chancellor’s latest Autumn Statement.
I think there will be a flurry of activity in this sector, up to April, then it will slow down very dramatically after that. Given the negative effect of the Stamp Duty rises in the Autumn Statement of 2014, I question the prudence and strategy of the Chancellor since he is meticulously placing a tourniquet around the ‘Golden Goose’s neck’ and will then wonder why no ‘golden eggs’ have been laid.
The heavy hand of government invariably administers ‘a cure’ which is often worse than the complaint.
Central London activity beyond £2million has been slowly grinding to a halt with no respite in sight.
On the other hand the market between £200,000 and £600,000 is doing very nicely thank you and is a classic Bull Market with gazumping, and an acute shortage of stock available, thanks to the Chancellor’s Stamp Duty ‘give-away’ in 2014 Autumn Statement.
WHAT ARE MY PREDICTIONS FOR 2016?
Well, I believe that this lower end will continue unabated and will enjoy further price rises of between 5-8%. Inevitably, it will further disenfranchise the first time buyer but Help-to-Buy – although small in scope – will assist the lucky few in this regard.
Although regulations on mortgage lenders are even more labyrinthine than ever before it looks as though Interest Rates (and therefore Mortgage Rates) will not rise for more than a year or so as Inflation remains historically very low and will probably not even rise beyond 1% next year.
Mark Carney is effectively not needed at the moment (and this has been the case for the last 5 years) and he only ‘puts his head above the parapet’ about future changes to Interest Rates (which are invariably inaccurate) in order for all of us to know that he is still there.
Sadly, the higher end of the market will suffer as it has done during the year with, probably, the same resultant effect on values which could well ease further by between 5-10%.
My own view is that if you have spare cash and you are in stable employment there is no better place than residential property to invest money. I would take acceptable risks by borrowing as much as is advisable, since the alternative investments are either far more risky or dull i.e. Bonds.
If you are thinking about a Buy-to-Let investment then you should consolidate this before the April watershed.
Investments in Classic Cars will still be better than most other alternative investments since there is a finite supply of these and demand usually outstrips the former.
RESIDENTIAL PROPERTY MARKETS FIVE-YEAR FORECAST
As we all know, the Residential Property Market is divided into three segments – the lower end, the middle and upper super-prime. They do not always ‘march in tune’ but in the end one can intrinsically affect the other.
Now for my thoughts as to the five-year view adding, of course, the necessary caveat that projections over this amount of time are pregnant with known and unknowns.
As the level of mortgage interest rates invariably can have the most influential effect on sentiments and affordability let’s take a look at this. Rates have remained at an unprecedented low for a very long time and, inevitably, will gradually rise in the first two quarters of 2017 by increments of ¼%.
There are no inflationary pressures at the moment (in fact there is short-lived deflation this quarter) that should worry the Governor of the Bank of England, Mark Carney. In fact a little bit of inflation of between 1-2% probably wouldn’t do us any harm since then debt shrinks in relation to equity which is no bad thing.
The political climate will remain constant all the way to 2020 and beyond since it is likely that the Conservatives will ‘be in power’ for two terms given the parlous state of the Labour Party under the management of ‘Worzel Gummidge’ (Mr. Corbyn).
If the World Economy (particularly China) starts to grow again this will be good for commodity prices i.e. steel and oil. Europe will eventually start growing at an acceptable rate and that will be beneficial for British exports that, frankly, have done remarkably well to-date.
In the Chancellor’s latest Autumn Statement the austerity measures that were predicted have been greatly reined back by the Treasury’s windfall of £27 billion and it looks as though the economy will grow over the electoral term by something in excess of 2% that is very good in global terms.
The referendum next year will be a close result but I think the ‘Great British Public’ are risk averse and Brexit would be too challenging for them to ‘stomach’. I am going to assume that the Prime Minister’s reforms (that are quite tame) will be enough to keep us in Europe but under slightly different arrangements. I am not sure that even if we did exit Europe it would have a negative effect on the economy but it may be an imponderable now that will become a ‘non-issue’.
Assuming there are no further changes to SDLT rates I see values rising at the lower end of the Residential Property Market by an average of 3% per annum over the next five years. The growth in the 4th and 5th year could be affected by higher mortgage rates.
At the moment the market in the middle price sector is steady but frail and only price realism is being rewarded by activity. There is no price growth at the moment and the market is moving sideways but I think this will change over the five-year term to show modest growth of up to 1-2% per annum.
It is far trickier to predict where the higher/prime end will be now that it has been so badly affected by Stamp Duty rises, changes to foreign ownership rules, ATEDs and Non-Dom reforms. At the moment, transactions are down by up to 50% and values are easing by 10% per annum. There is a massive excess of stock with little demand. This market is made up of 75% UK buyers and 25% foreign nationals but at the very high end of the scale this ratio is reversed. As long as the oil price remains so low, the Russian economy remains depressed and the International Stock Markets in China and Russia uncertain, I do not see how any positive territory would be gained in values and, they may, fall further until they level off.
If the world oil price were to recover this would increase revenues for certain international individuals that may result in more buyers from abroad which will increase demand at the higher end but it may put upward pressure on inflation and this will be enhanced by higher inflation in wages in the private sector as the capacity in the UK shrinks.
If the UK goes into Recession during the next five years it will greatly affect the economy and I see prices in all ranges losing ground but this seems unlikely from anything that we can predict now.
Historically, Buy-to-Let investments have been an excellent alternative to private pensions that successive governments have reined back (the latter) over the years. The Chancellor has now put a 3% premium on these, and second homes, which I feel will have a breaking effect on this sector when you add the loss of Tax Relief at the higher end which bites in April 2016.
One hopes, of course, that over this time there is no major world incident that could upset ‘the apple cart’ but actually, at this moment in time from an economic point of view, there are not that many clouds in the sky to worry us.