Since 1997, house prices have increased a lot, actually by 259%, with the UK average home now likely to cost £218,255 [Source: Nationwide]. Over the past year, property values have increased by 2.7% compared to the previous year but the national picture seems to be indicating that a slowdown is under way with house prices now rising at their slowest rate since 2013.
It has been well publicised that the market in London has been subdued for the past two years and data recently released by the Office for National Statistics and the Land Registry continues to paint a bleak picture for existing homeowners in the capital. In the year to June, prices fell by 0.7%, the fastest rate since the financial crisis of 2009, with three London boroughs experiencing double digit falls – the City of London 23%, Kensington and Chelsea 14% and the City of Westminster 12%. In spite of these dramatic falls, property values in the capital remain expensive however with the average value of a home remaining at £477,000, more than twice the UK average and one of the reasons for the cooling of the market is affordability.
There is regional variation however and, since the start of the year, the strongest growth in values has been in Wales (1.4%) and the North East (3.3%) with the South West suffering an apparent fall of 2.5% [Source: Zoopla].
Recent headlines have been based upon the views of property “experts” who claim that the average value could fall by as much as £70 000 in certain areas. So what is the basis for their view? What are the factors that the “experts” claim are likely to have an influence on the market? They state that the primary ones are supply, demand, affordability, Brexit and interest rates.
With an increasing population, demand is prevalent for houses and it is recognised that there is a chronic shortage of homes with the Government employing a range of measures to encourage more development. With such a shortage, the value of homes is being underpinned but the experts now claim that demand will weaken as potential buyers are unable to afford to buy due to increased inflation and declining incomes leading to lower house values.
Ask most in the property industry what is causing a slowdown in the market and the most prevailing answer is uncertainty caused by Brexit. Since Brexit was announced in June 2016, the pound has weakened significantly losing 13% of its value against the dollar and 18% against the euro. Brexit is claimed to be the main reason for the fall in the value of the pound which, in turn, has led to inflation and tightened budgets without an upturn in wages. As such, the view of the “expert” is that less people can afford to purchase homes leading to diminished demand. With widespread agreement and more apparent, however, regarding Brexit is the impact on confidence and the increased uncertainty on how well Britain will negotiate its exit and future dealings. Regardless of your views on Brexit, this is leading to those who would normally consider moving to delay any decision until after March next year.
Currently mortgages remain stable and affordable and the latest increase in interest rates is not likely to have much impact on the level of demand, possibly excepting London where loan to income ratios are extremely high. If inflation continues to rise and the prospect of further rate increases becomes more likely then affordability could become more stretched and confidence could be affected to a greater extent. In addition, in spite of unemployment levels being at a 42 year low, with lacklustre wage growth, it seems more buyers are bumping up against the tighter lending criteria brought in four years ago to prevent another boom and bust cycle. The costs of moving can also be prohibitive, particularly where higher levels of stamp duty apply, and when the higher rates were introduced by George Osborne, some sectors of the property market saw interest from potential buyers dry up overnight.
So whilst there are “experts” preaching doom and gloom, there are also those who consider the housing market is going to go through a “gentle slowdown”, a “modest correction” or a “soft bump”. Whilst the factors referred to above may apply, I share the view that these factors won’t cause a property meltdown. In spite of increased numbers of properties coming to the market since the Spring, the availability of suitable properties is very low and it is the lack of supply rather than the strength of demand that is maintaining house values. The likes of Nationwide and Halifax predict that values will plateau throughout 2018 producing an average increase in values for the year of around 2.5%. That seems realistic for the UK as a whole.
Some, however, have described the property market as “weird” and as not having a “set pattern” and the team at Killens can relate to that. The levels of supply and demand can vary considerably at a local level – from village to village and from street to street – and we have seen this lead to variation with some properties being sold by inviting final offers and selling for more than the guide price. In other areas, demand has been more subdued.
Looking forward, it is impossible to predict with confidence how the property market may perform going into 2019. Supply is likely to remain constrained and this will help underpin values but any direct economic impacts – such as the pound weakening, inflation surging and an increase in interest rates - or a fall in confidence resulting from the Brexit negotiations could lead to stagnation or a decline in values. Equally, if Brexit negotiations are successful, economic growth continues to remain positive and confidence is boosted, house prices could increase faster than initially thought.
In conclusion, therefore, no crash in the housing market is considered imminent but neither is the market likely to be exciting with values predicted to generally stay static or to increase slightly in spite of cautious demand. Much depends upon how economic and political confidence fares. As stated, however, the market is unpredictable and there can be significant local variation and, to an extent, we are finding that North and Central Somerset are popular areas to buy a home and the right property in the right location can be greeted with bullish demand.
Tom Killen BSc (Hons) MRICS FAAV