The UK property market is polarising again. Although the Land Registry has recently reported prices rising 6.3 per cent, the London market is racing ahead at 9.5 per cent. Mortgage borrowing is rising at 10 per cent according to the Bank of England, as buyers bid up prices. Other reports suggest that price rises outside London have begun to slow, however. The capital’s rapid growth has been fuelled by a strong local economy, a growing population, rising wages and a boom in the fortunes of the City. These factors have all contributed to a sharp upturn in the number of new home buyers in the capital as well as continued confidence in the outlook for the market.
Expecting further rises
According to our research, 80 per cent of home buyers and sellers in London expect house prices to continue to rise over the coming year. They expect prices to rise 6.3 per cent on average, slower than the 9.5 per cent seen over the last 12 months. Buyers and sellers elsewhere around the UK are also optimistic about the outlook for prices, they expect 5.5 per cent, but the current momentum in the market outside the capital is not as strong, so these expectations may be disappointed.
Family homes are key segment which has been seeing rapid growth. Looking at properties advertised on propertyfinder.com, the average four-bedroom property in the UK costs £336,500, up from £303,000 in 2004, while in London it is a staggering £702,000 up from £636,000 in 2004. Even though buyers of these properties are typically trading up and already have healthy levels of equity, unlike the super-rich, they do tend to need large mortgages.
Demand for family homes is particularly strong, growing at a faster rate than demand for flats and small houses. Indeed, there is a severe shortage of family homes on the market. Just last week, I received a neatly printed note through my letter box from a couple desperate to buy a house in my area and appealing to owners thinking of selling to contact them first. They lamented the lack of supply and noted how much competition there is from other buyers like themselves. Letters from estate agents looking for property are commonplace too.
Transaction costs
A key reason is the cost of transacting these properties, particularly in London. In the past, people were prepared to make smaller steps up the housing ladder, but with Stamp Duty now costing £35,000 for the average London four-bedroom home, and £10,000 for the average four-bed across the UK, people will inevitably wait longer and make fewer, but bigger jumps. That has dramatically reduced turnover of larger houses.
But the lack of turnover also reflects the skewed mix of the UK’s housing stock. Our research shows a large oversupply of two-bedroom properties and an acute shortage of three and four bedroom homes. Developers continue to focus on building flats, spurred on by an inappropriate planning policy. It is hard to see this correcting in the short-term.
A special case
London is something of a special case. A concentration of super-rich buyers creates a market within a market, and that does skew the overall price figures a bit. A rush of millionaires willing to splash out on multi-million pound homes in some of London’s top areas is pushing prestige property prices to an all-time high. Leading the charge is the influx of rich overseas buyers wanting to purchase a central London property. City high flyers taking advantage of this year’s record bonuses will also contribute to soaring prices. Recent reports suggest an estimated 4,000 City employees will receive £1m plus bonuses this Christmas. Much of this money will find its way into bricks and mortar, and not just in the capital. Holiday homes in Britain and abroad are also much coveted. As both rich foreigners and City bonus winners are largely cash buyers, or at the most only require a relatively small loan-to-value, they are able to bid prices up well beyond what traditional income multiples might support. These people are not the broker’s key customer. Unless the flow of wealthy foreigners dries up, or the City experiences a rapid reversal of fortune, these trends look set to continue.
Richer buyers with an eye on property can still be an important customer for brokers though, if they are looking at property investment. The private rented sector is very undergeared and for those expanding their portfolios, specialist buy-to-let mortgages are an obvious choice. The tax advantages of offsetting rental income against mortgage interest are a clear attraction.
If the market continues to polarise, policy makers are going to find themselves in a dilemma. The Monetary Policy Committee (MPC) raised interest rates by 0.25 per cent in its latest meeting, taking Base Rate to 5 per cent. City commentators say another rise may follow. Home buyers can take modest interest rate increases in their stride. Indeed, competition among lenders has hotted up lately, and despite rising swap rates, ‘best-buy’ fixed mortgage rates have actually been trending down. However, the psychological effects of higher Base Rates are not to be ignored. The MPC may have to let the London market find its own level in order not to punish those outside the capital with higher rates and potentially even lower house prices. We don’t want to see a repeat of the monetary policy mistakes of 2004.
