Newsletter

PROPERTY TRENDS ISSUE 8

EDITORIAL

Welcome to the October 2018 edition of Property Trends – the monthly bulletin that focuses on property trends for residential property investors, homeowners, landlords and tenants.

Our focus this month is:

  • UK house prices – yes, one of our favourite topics….are they set to crash?
  • Higher stamp duty on foreigners – smart idea or typically flawed thinking by government? 
  • The “A List” of property trends, Part 2 – was it unforgivable to overlook this trend last month?
  • Mid-City lessons are important – but where exactly is Mid-City and what exactly is the message?

Don’t forget to let us know what you think of the trends covered each month. Are we identifying the right trends and giving them sufficient weight? Are there important trends we are not covering and should cover?

Please let us know your views using the “Leave a reply” form at the foot of this bulletin. 

Editor


ARE HOUSE PRICES SET TO CRASH?

financial-crash-market-meltdown-2005-housing-James-Stack-Donald-Trump-news-latest-1206509.jpgOne thing clear about the direction of house prices this year is that it is unclear. 

Concerns have been heightened recently by the Governor of the Bank of England warning of a worst-case scenario fall of up to 35% in the event of a disorderly  Brexit.

Some months some indicators suggest prices are on the up, even as others suggest they are on the way down.

A classic example was in August:

  • According to Halifax annual house price inflation was at 3.7%, its highest rate in almost a year
  • According to Nationwide, house prices fell at their greatest level in 6 years.

One gave rise to optimistic headlines that property prices were doing just fine, the other to somewhat doom-laden predictions. The political bias in how house price stats are interpreted is an embarrassment to anyone with half a brain. 

Leaving aside the fact that the different indices never quite measure the same things at the same time and patterns are rarely clear-cut, it is easy to select house price data which support this or that position – depending on your bias.

Some sectors of the media seem to delight at the merest hint of house price falls, wheeling out industry experts to buttress their arguments, while others exaggerate any sign of growth, again wheeling out industry experts to add weight to their arguments.

The reality is that house prices are as difficult to call as the economy. Those purporting to be able to do so usually identify their accuracy retrospectively. As they say, there is nought as wise as hindsight.

But while specific predictions are ultimately educated speculation, it is helpful to identify important, clear or prevalent trends.

How you extrapolate from them, whether you see boom or bust, is for you to decide, hopefully after reading your history books and listening and talking to as many people in the know as possible.

So with just a quarter of the year to go, what trends are evident in respect of house prices?

Here are those that seem particularly eye-catching, uncontroversial and significant – and which can be backed up by the stats without too much dissent:

  • The country as a whole has seen average house price growth of around 2% so far this year
  • Prices in Central London have fallen significantly since the 3% stamp duty surcharge which came into effect in April 2016
  • That fall has rippled out to affect less central boroughs
  • London prices as a whole fell 0.7% in the year to June 2018 (ONS)
  • Some parts of the South East are now falling (Nationwide data September 2018)
  • There is a two speed market, broadly the North is doing significantly better than the South
  • London is being outperformed by nearly all of the other main cities, with the best performing cities in the North; Manchester coming out on top in most stats
  • Terms such as “North” and “South” are generic terms and conceal significant differences, nuances or contradictions at any one time; for instance: while prices in Yorkshire & Humberside increased 5.8% on an annual basis in September 2018, the North East fell 1.7% over the same period (Nationwide data).

It is also worth noting that these trends exist in a climate of:

  • Political and economic uncertainty on the back of Brexit
  • Interest rate rise of 0.5% to 0.75% in August 2018
  • Indications that interest rates are on an upward trajectory.

Taking everything into consideration, my sense of the current position is that the long term prospect for house prices will remain uncertain until Brexit has been completed and the type of Brexit achieved is clearer.

In the meantime, prices across the country as a whole seem likely to slow further and more areas seem likely to go into minus as the London price falls ripple outwards; it has to be another year at least before the picture becomes incontrovertible.

The position should start to become clearer next Spring – a time of year traditionally strong for the housing market.    

Is there a real chance that prices will fall by 35% in line with the warning of the Governor of the Bank of England?

Time will tell. Realistically things could go either way. Once Brexit is done and dusted, there could be a “Brexit bounce” with prices going upwards – starting in Central London. 

Brexiteers would no doubt claim that as a big victory, but the real cause could be the “18 Year Property Cycle” … but that is something for another day.

Dalton Barrett
Rebel Property Coach


HIGHER STAMP DUTY ON FOREIGNERS

Stamp-dutyLead.gifThere is already a 3% stamp duty surcharge applicable to all buy to let landlords and owners of second homes.

Now the UK government is looking to milk the docile stamp duty cow again by imposing a 1% to 3% surcharge on foreign buyers.

The money will apparently be used to reduce rough sleeping – although the news reports have not stated whether the government will also be addressing the causes of  this national disgrace. 

The government’s move can be interpreted as consistent with similar  initiatives in places like Canada, Australia and New Zealand – aimed at reducing cash-rich foreign investors – identified as a major cause of unaffordable house prices.

There is a clear trend to clampdown on over-exuberant foreign investors in locations where local people are being priced out of the market.    

The indications are that such initiatives do help to cool prices – although whether the impact is long term is debatable.

The position of the UK government is interesting. In large numbers foreign buyers have already stopped investing in London, especially prime Central London – due to the 3% surcharge which hit BTL landlords and second homers in 2016, as well as sky high prices and low yields.

There is ample evidence that many foreign buyers turned their interest north to places like Birmingham, Manchester and Liverpool, where the impact of the surcharge is less due to lower property values and significantly higher rental returns.    

The interest of foreign buyers has undoubtedly pushed up property prices in Manchester which, in recent times, has been cited as the best performing city for house prices on several indicators.

However, Nationwide’s September 2018 house price survey indicates that the rate of growth in parts of the north is falling faster than elsewhere in the country. The good news story for northern house prices may already be coming to an end.

Generally, Nationwide’s data is pointing to a slowing of the housing market across the country as a whole with the exception of a few pockets, notably Yorkshire & Humberside. Prices are into negative territory in London (-0.7%), parts of the South East (-0.3%) and the North East (-1.7%). 

In addition to the 2016 stamp duty surcharge, house prices have slowed for a number of reasons including: widespread unaffordability, uncertainty surrounding Brexit and a harsher borrowing and income tax environment for buy to let investors. 

With the housing market already slowing, it is difficult to see anything other than an acceleration of the slowdown if a stamp duty surcharge on foreign buyers leads to more of them turning their backs on the UK.

A fall in house prices will of course be great news for first time buyers;  but it won’t be good news for developers – especially as there are tens of thousands of new units in the pipeline over the next few years.

Will UK home buyers in places like Birmingham, Manchester, Liverpool and Leeds exist in sufficient numbers and have the financial resources to mop up the excess stock no longer required by foreign buyers turning to pastures new?

That has to be doubted.  A large proportion of the countless new-build flats being constructed in our great cities were started on the basis of massive demand from cash-spending foreign purchasers – especially from the Far East.

They were not constructed on the basis of selling only or mainly to local people – who typically found such properties way out of their affordability league.   

Are the people anticipated as renters going to have the money to become buyers – even at lower prices? That does seem somewhat optimistic.

Could UK BTL landlords take up the slack? That is possible to a degree but the extent has to be doubted since they have been cowed by the succession of anti-landlord policies since 2015.   

A stamp duty surcharge against foreign buyers would bring down prices but it could also bring down builders and developers in the process. There is also talk that the government could end “Help to Buy” early; that too would be a body blow to the building industry. 

The eventual outcome of Brexit, whatever it is, could also do serious damage to the sector. 

Discouraging foreign buyers is certainly a way to cool prices. But in the UK is that remedy still necessary when prices are already on the way down?

If foreign buyers turn their attention elsewhere, will that leave developers with too many units to sell and the risk of crippling financial losses?

The real casualty of a stamp duty attack on foreign property investors seems likely to be builders and developers, and the UK housing market as a whole.

Foreign investors can always find other countries where they can invest. But can UK housebuilders survive unscathed without foreign investors?

Let’s  hope that by the time the foreign investors have gone, rough sleepers have also gone from our streets. Of course, no one should hold their breath.

Dalton Barrett
Rebel Property Coach


THE “A LIST” OF PROPERTY TRENDS: PART II

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Last month I looked at 7 heavy weight trends which seem poised to make a huge impact on the property landscape going forward:

1. Move away from home ownership to renting

2. Growth in mortgage-free properties

3. New political champions for renters

4. Reform of leasehold law

5. Growth of fractional ownership

6. Longer mortgages

7. Growth of intergenerational mortgages.

However, on reflection, there was one trend I should have covered first – on account of its basic, pervasive or fundamental nature and the fact that it seems to underpin the thinking of Government and Opposition politicians alike.

That trend is the growth of property taxes by stealth. 

Number 8 on the “A List” but it should have been number 1 is the matter of the increasing amount of tax revenue coming from property. 

The vast bulk of taxes collected by government is in the form of income tax, NICs  and VAT.

However tax raised on the back of property is on the rise. Such taxes, typically referred to as “capital taxes” are a growing share of the total tax pot of the government.

Capital taxes include stamp duty, capital gains tax and inheritance tax.

In a briefing note on its website on the 1st May last year, the Institute for Fiscal Studies (IFS) noted that smaller taxes would play an increasingly greater role in funding the country’s expenditure.

Those with an understanding of how crafty politicians work see this trend as a way politicians can nudge up taxation – with only a small section of the public noticing at any one time.

Yes we are talking about “stealth taxes”, taxes which go largely unnoticed; the term is not as common as it was, but the practice most certainly has not ceased.   

The 3 tax giants – income tax, NICs and VAT – which affect pretty much everybody, cause pain and outcry whenever they go up.

Therefore relying on the smaller, less prominent taxes – including capital taxes – is a cunning way for governments to raise taxes with the minimum of objection and bad publicity.

In the tax year 2017-18, capital taxes comprised 5% of the total tax cake. 

According to IFS, the share of revenue attributed to capital taxes is set to double in the period from 2010 to 2021.

Part of the increase is due to the fact that rising property values increase the tax take naturally. However, IFS also pointed to the 3% stamp duty surcharge on BTL properties and second homes, introduced in April 2016.

Further, it seems that the government is planning a 1-3% surcharge to apply to foreign property buyers, possibly in the forthcoming budget.

There has even been talk that the 3% surcharge could be increased.

Capital taxes affect a relative small section of the electorate, and an unpopular section in the case of buy to let landlords and property investors.

If a redistributive Labour government is elected at the next general election, they could build on what the Conservatives have started by ramping up stamp duty and increasing capital gains tax.

It seems likely that the future will be marked by ever increasing capital taxes whatever the colour of future governments.

That is not good news for BTL landlords and property investors in general; a growing part of their capital will be eaten up by taxes, reducing their return on investment (ROI) and profits.

All things being equal, property investment seems likely to become more challenging and less profitable for the foreseeable future.

A property slump could offer some respite; but in the long-term the political advantages of raising capital taxes – with relatively few dissenters – means government is not likely to let up any time soon.     

Dalton Barrett
Rebel Property Coach


MID-CITY LESSONS ARE IMPORTANT

property investment.jpg

For those not into estate agency speak, “Mid-City” is the name some estate agents have given to areas just outside prime central London.

Traditionally they have been referred to as “city fringe” but now Farringdon, Clerkenwell, Bloomsbury and Barbican have been rebranded as “Mid-City”.

As ever with areas being by renamed agents, the goal is to raise profile, desirability and demand – and Mid-City needs all 3 at the moment.

Following on from the serious price crash in the prime residential parts of Kensington & Chelsea, Westminster and the City over the last couple of years, price falls are now inevitably rippling out into Mid-City.

According to a report in the FT online on the 3rd October 2018, the average price of a Mid-City residential property is £832,750 and the area has the benefit of being 10.7% cheaper than desirable surrounding locations like Islington.

However sales have collapsed over the last few years. There were 59 sales in the £1m range in the 12 months to March 2018, down from 107 in 2014.

New build prices have fallen by about 20% since the end of 2015, with second hand properties falling by 15%.

About 50% of new stock is reported as discounted.

The usual suspects are thought to be the cause of the crisis:

  • Brexit uncertainty
  • 3% stamp duty surcharge which came into effect in 2016
  • Phased reduction of mortgage interest relief for some BTL landlords.

The bottom line is that Mid-City is suffering a serious house price crash and hardly anyone seems to know about it. But it could be an event anyone interested in house prices should be watching with trepidation.

The famed ripple effect of a property crash spreading out from central London to affect the rest of the country could be on the move.

Nationwide data for September 2018 shows that house prices in some areas just outside London fell into minus territory (-0.3%) for the first time in years.

There is every possibility that in coming months price falls could spread to the South East as a whole and then beyond.

At the moment, Midlands and Northern house prices as a whole are growing fairly strongly in the 4-5% range, but history shows that the slowdown in the South is likely to affect other areas eventually.   

However, none of this should be assumed to be inevitable.

The future of course is always uncertain; foreseen or unforeseen factors could send prices upwards or downwards.

Once Brexit is done and dusted there could be a boost to the housing market as developers, sellers and buyers find it easier to make long-term decisions.

The plan to make foreigners pay extra stamp duty, if it happens, could lead to a mini boom as buyers rush to buy before the stamp duty rate increases.   

The government could surprise everybody and reduce stamp duty for certain buyers – such as first time buyers – and that too could be a fillip for house prices.

Interest rates could be cut in the event of a hard Brexit damaging the general economy – buoying up house prices in the process.

On the other hand, the ripple could continue to spread beyond Mid-City, outward to the South-West, Wales, the North and Scotland.

The big question is how fast those ripples will go and with what force?

At the moment, it seems like the stone that was thrown into the pond in Central London was not particularly large; the ripples are significant and are fanning out, but not with any great force or speed. 

What is not clear at the moment is whether another stone is going to be thrown and how large it could be.

One thing is clear, the waves of falling house prices are rippling out from Mid-City and everyone owning a residential property should sit up and take note.   

Dalton Barrett
Rebel Property Coach

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DISCLAIMER: This bulletin, which is provided for information purposes only, is fully intended to be accurate but no representation as to its accuracy is intended. It does not provide legal or any other advice to be relied upon. All liability to all persons acting or not acting on anything in this bulletin is disclaimed. NOTE: Where you require advice to rely on in any matter, it is best practice to consult and retain a suitably qualified expert in the relevant field.


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