At the beginning of 2014, the super-hot market ignited by the introduction of Help To Buy the previous April finally started to cool. Only London, fuelled by speculation and overseas investors, continued to burn like an extravagant firework trying to defy the laws of gravity. Inflation in the capital touched 25% and kept the average figure for the UK artificially high through the early part of that year. But, even the most powerful of rockets must succumb eventually and fall back to earth.
Once London started to move more in line with the rest of the UK, the indices started to fall. And, by the autumn of 2014, the market had moved into a fragile state of equilibrium predicated on the underlying market conditions of high demand/low supply and low borrowing costs, but restrained by low transaction levels, low confidence and an uncertain outlook. It’s been that way ever since, but it’s a precarious balance.
I believe this new pattern in house price movements is with us for the foreseeable future – at least up until Article 50 is triggered in any case. I still can’t quite understand those who suggest the effects of leaving the EU have been nothing like we were told they would be. My favourite quote regarding Brexit and its effect on the UK economy came from the wily Charles Dunstone of Carphone Warehouse fame, “What I feel about Brexit is that it’s a little bit like we’ve jumped off a 100-storey building and have just passed the 50th floor and we’re saying, ‘Actually this isn’t so absolutely terrible’ — but we haven’t hit the pavement yet.”
Well, hit the pavement we will, and it’s way beyond me to predict the outcome of that crash landing, and, in my opinion, beyond the vast majority of those that make a living from doing precisely that. The trouble with pieces like this is they are generally cliché-ridden from top to bottom, so let me apologise in advance for this one, but it is tough to find anything better than ‘the calm before the storm’ to describe our position at the moment. For the purposes of this report, I am presuming the pavement will still be a little way off by the time next December rolls around.
Let’s focus on the short term, the next six months, to give us some of the background facts we need to determine how the market is going to move in 2017. Firstly, volumes.
We won’t know what the December volumes were until the HMRC publishes its data on January 21st, but it looks virtually certain that the total number of residential transactions in the UK in 2016 will be almost exactly the same as they were in 2015 – just over 1.2m. (And pretty much where they were in 2014 too – see the chart below) And, much like the RICS, I simply can’t see it being very different in 2017 either. Last year, aside from the crazy pre-budget rush in March to beat the hike in stamp duty for investors, when over 171K transactions took place, the monthly average settled back to around 100K and early indications show little signs of change.
There is another tax hike planned for property investors this year too, as tax relief is removed for investors and buy-to-let borrowers. The big difference with this one is that there won’t be any great stampede to buy property before it happens. In fact, it seems likely that the reverse will be true. Small investors in particular, on tight margins and high levels of borrowing, may well look to reduce their exposure, especially if they can secure a capital gain on disposal.
This won’t necessarily have an adverse effect on the market. I have said in the past that even if some of the more wildly pessimistic estimates are to be believed, and we see 200,000 properties flood on to the market as a result, the negative effects would only be temporary. In fact, I believe that greater availability would increase activity and improve market conditions thereby lifting volumes in the longer term.
According to the RICS, estate agents’ stocks are at, or close to, an historic low, unable to meet demand pretty much right across the country. And yet prices stay relatively static. I referred to this idiosyncrasy of the housing market in my piece last year and the facts from 2016 bear that theory out. More supply would lift volumes and create demand, thereby under-pinning prices, up to a point.
I feel confident we won’t see any material increase in volumes in 2017. In fact, I believe we’ll see a slight decrease as consumer confidence continues to slide and mortgages get more expensive and slightly more difficult to come by. The chart below shows my 2017 prediction that transaction numbers with a value higher than £40K will fall to around 1.2m next year with a significant dip in the summer months.