Our dear Chancellor Gordon Brown, wrings his hands with concern over lack of affordability for key public sector workers but does little or nothing to encourage the supply of more properties to the market – the critical factor in restraining growth in property prices.
We have Stamp Duty tax with penal cost escalations that distort the pricing of properties and encourage home owners to improve rather than relocate. In the pipeline we have Home Information Packs – an effective tax on putting a house up for sale – however, it is financed. In addition, raids on the pension system through changes to tax credits on dividends and constant ratcheting of funding requirements mean whole sections of Middle England seeing property as a panacea to the pension problems thus tying up stock in investment property to rent.
Buoyant demand
So what does this mean for UK property prices? Demand certainly seems to be buoyant relative to supply. Stock among estate agents was low at the start of the year – one leading estate agent advised that typical stock per branch across the country was as low as 35 properties – some 25 per cent lower than at this time last year, which was in itself a historically low position. This continues to reflect the low levels of instructions across the industry for a second year in succession.
As a result, buyers are chasing a diminishing supply of stock compared to last year and as a consequence house prices remain extremely buoyant. This lack of supply is dominating the impact of rate changes to date as far as can be seen in the limited data this year. So what is the outlook?
Outlook
As specialists in mortgage risk, we closely follow the behaviour of accounts taken into possession. Typically the properties taken into possession as a result of default are difficult to sell and carry a degree of blight and impairment. Looking at a sample of data from 2006, it can be seen that sale prices exceeded or equalled estimates in all but two months of our analysis. Similarly, the end of the year stock of repossessions outstanding for more than three months was less than 10 per cent of new possessions in the year. Given that this figure reflects the time taken to legally conclude the sale, it can be seen that even these most difficult properties are turning over rapidly. This is yet further evidence that housing supply is extremely short and therefore creating an extremely tight market. It is this dearth of supply that is driving the price increases that recent evidence suggests are re-emerging.
Rate effect
The Bank of England Base Rate increases seen in 2006 and 2007 have undoubtedly impacted on affordability, particularly for recent purchases on variable rates. However, the dominance of fixed rates in the current mortgage product market, to a considerable extent, insulates the borrower and the market from these rate increases. The critical stress point for newer borrowers, therefore, comes at the re-price point at the end of the initial fixed rate period. The question is, therefore, whether this re-pricing will create sufficient pressure to force additional property onto the market either from the residential or investment stock? Alternatively the impact could be to restrict upgrading or relocation and thus could restrict supply further.
Recent data from the Council of Mortgage Lenders shows that the number of mortgages three months in arrears or more fell from 0.97 per cent of all mortgages at the end of 2005 to 0.89 per cent at the end of 2006. Its analysis concludes that this fall reflected improving employment, stable levels of mortgage payments and only modest payment shock for borrowers coming out of discounted and fixed rate periods. This, therefore, suggests that further rate increases will be required to put existing borrowers under sufficient pressure to precipitate additional supply to
the market.
Restricting supply
So from the above it seems probable that Base Rate increases are more likely to restrict property supply further and that the current historically low level of instructions will continue. As a result, estate agency stock will remain low and house prices are likely to stay buoyant.
The question, therefore, for the Chancellor is what action could be taken to stimulate the supply of property to the market and thus reduce inflationary pressure. In the short term it seems clear that interest rate increases are only likely to exacerbate the situation. Perhaps a reduction in or reform of Stamp Duty is in order?
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Tim Fletcher is group sales and marketing director at the Baseline Capital Group
