Monthly Market Review – March 2017

With blossom starting to appear on the trees and the weather improving, there is a sense that spring is nearly upon us, and with it a time of year of increased interest in the property market.

Activity levels over the last month have been steadily improving across most parts of the UK, albeit underlying market conditions remain characterised by historically low levels of available properties to purchase. However, those homes that are available for sale are still needing to be realistically priced to attract value sensitive buyers.

Major house price indices concur in recording a small incremental increase in average house values. However, of note is that Nationwide recorded that the quarterly rate of price movement has now increased to 1.1%, with its February data marking the first such increase after three months, which provides a further useful indication of rising price confidence and transaction volumes.

Budget relief and frustration

Having dominated policy announcements in successive budgets over recent years, there was a mixture of relief and frustration that the Chancellor Philip Hammond made no housing policy announcements in what was the last ever Spring Budget. Several commentators, including the Council of Mortgage Lenders, had called for the government to rethink its stance on recent Stamp Duty (SDLT) increases on high value and additional property purchases, but no changes were forthcoming to revise such policies, or indeed introduce any further charges.

At the same time the Office for Budget Responsibility (OBR) revealed their latest economic forecasts, confirming economic growth for 2017 has been revised upwards from 1.4% to 2%. This data, together with the ONS confirming that unemployment levels have now fallen to 4.7% – the lowest rate since the summer of 1975 – suggests a reassuringly robust economy to support the housing market. Average values are expected to rise this year at a higher rate than previously expected by the OBR when the last forecasts were published in November last year. Prices are now expected to rise by 6.5% this year, slowing to 4% in 2018.

Residential still outperforming

Over the last year, the residential investment sector performed better than all other property classes including retail, industrial, leisure or office property. The MSCI/IPD ‘Quarterly UK Index’ tracks these real estate investment categories and their headline ‘All Property’ total return (yield and capital values) for 2016 was 3.5%. This is significantly lower than the total return in the year before (13.1% over 2015) as a more uncertain outlook and the impact of Brexit affected performance. There was considerable variation in sector performance last year. The performance for residential has remained strong, being the top performing sector with a total return of 8.3%.

Despite these top-flight credentials, government intervention in the residential buy-to-let market is starting to bite. Latest data from the Council of Mortgage Lenders records the volume of mortgages taken out in January 2017 fell to 5,900 from 9,700 the year before, and from a peak of 29,100 loans in March last year – just before revisions to SDLT came into place. This shift in transactions also partly explains why HMRC have recorded an all-time high of 38.9% of transactions being cash funded last year prior to the changes in SDLT. Cash buyers are likely to remain out in force this year, keen to leverage their buying power in return for price discounts.

Prime to shine this spring?

Having been subjected to disproportionate changes in stamp duty costs, buyers at the top of the property market have been noticeably absent in some prime markets around the country over the last 12 months. However, during the early months of 2017 there are tentative signs of a resurgence in purchasing activity for high value homes.

In the prime central London market homeowners accounted for around a third of buyers over the last year and this proportion of transactions is predicted to further increase this year as investment buyers become fewer in number. This trend is likely to be supported by homeowner buyers seeing a ‘window of opportunity’ to acquire quality homes at more attractive prices. Based on research from LonRes, there is evidence of market conditions normalising in London. Transactions had fallen by as much as 50% in Q2 last year, but by the end of Q4 and heading into 2017, quarterly transaction volumes in prime central London were only around 10% lower year on year.

Outside of London, Garrington has seen across the many prime regional markets in which we operate, renewed purchaser activity; particularly between £1 million to £2 million and around the £5 million price bracket. Up to £2 million, buyers appear to be less sensitive to increased stamp duty levels. At £5 million and above, whilst the sums due are considerable, there appears to be an increasing acceptance that these tax charges have become the new norm and are part of the costs associated with acquiring a home of this calibre.

Market conditions over the coming months are likely to set the benchmark for what to expect for the remainder of the year. However, based on current positive economic indicators and improving levels of buyer sentiment there are certainly grounds to be cautiously optimistic for a brisk spring market.