Monthly Market Review – August 2016

Whilst property buyers and sellers are still seeking clarity on what is really happening in the market, the last month has been one of further mixed messages. It is still too soon to judge how Brexit is really affecting the housing market and wider economy. According to the Royal Institution of Chartered Surveyors (RICS), both demand and sales dropped in July – with sales transaction volumes pointing to the fastest decline since 2008.

In truth, the compound effect of summer holidays and the shock effect of the vote result may help to explain this data, which in isolation does not offer any robust conclusions as to the meaningful trends that are likely to shape onward market conditions.  For now the challenge for those wanting to buy or sell property is to gain a true understanding of what is really happening in their area and sector of the market, which has become further polarised by recent events and increasingly complex in nature.

History in the making

Policymakers at the Bank of England’s Monetary Policy Committee have taken the decision to cut the bank base rate to 0.25% – the lowest level since the Bank was founded in 1694. Governor Mark Carney also announced the launch of a wave of stimulus measures aimed at reviving the economy and offsetting the effects of a slowdown and fragile consumer confidence.

There is a long standing relationship between house prices and interest rates, with changes in base rates acting either as a stimulus, or used to calm the market. Interest rates dropped below 5% in 2001, in turn fuelling house price growth. In 2008, once rates dropped below 4% it halted the price falls triggered by the global financial crisis.

The Bank’s decision to cut interest rates by 0.25 points will help to support the housing market through a challenging period.

Optimism returning?

The vote to leave the EU was not the predicted result and initially caused turbulence in financial markets, and a crisis of confidence for both business and consumers. However, there are now signs that confidence is returning, with the Bank of England predicting that the UK is set to avoid recession and the realisation that Brexit will not happen for at least 2 years.

Recently published data from the British Retail Consortium reveals consumers are spending again and sales were up 1.9% year on year in July. Equally, industrial output grew at its fastest rate in 17 years in the last quarter according to ONS data.

Lack of supply continues

The cross-party Economic Affairs Committee released their report “Building More Homes” last month, and concluded that the Government’s target of 150,000 new homes per annum needs to be doubled to meet the nations’ demand for homes. They commented that it was very concerning that changes to stamp duty for Landlords could reduce the availability of homes for rent. The new Chancellor has the opportunity in the forthcoming Autumn Statement to reverse some of the changes imposed by his predecessor, to align fiscal policy with the recent relaxation in monetary policy by the Bank.

Never ending holidays

Whilst borrowers are undoubtedly one of the main winners from the base rate cut, savers are once again facing lower returns on their cash deposits. These paltry returns have left some people reconsidering property as an alternative investment. For those not wishing to become a traditional Landlord, the holiday home market offers a compelling logic with higher rental income, rising demand for holiday accommodation, capital growth, tax reliefs not available in the traditional buy-to-let sector and the option to use the property for holidays with family and friends.

According to Land Registry data, of the 60 coastal markets around Britain, 16 experienced house price growth of more than 10% in the last year, with average prices in Margate growing the fastest at 19.4% compared to the national average of 8.1%. With these rates of growth and the high rental yields available the blended returns look enticing.

From Devon to Yorkshire, Garrington has already been busy acquiring holiday homes for clients this year and anticipates that this trend will continue as more people review their wealth planning strategies against the new investment landscape.

Post summer bounce?

In their latest sentiment survey, RICS members have reported that the outlook for the market is now brighter, and that “confidence is more resilient than might have been anticipated”. This view is supported by others such as the Centre for Economics and Business Research which is predicting a continuing rise in house prices, albeit at a slower rate for the next 2 years than previously forecast.

Based on the activity Garrington is seeing in the market, it is clear that there is not a crisis in the market, just a lot of confusion and conflicting data.

For well-informed purchasers who understand their target market, the combination of lower borrowing costs and less competition from other buyers will undoubtedly create an interesting window of opportunity in the months ahead.