Crystal ball: A triple whammy of factors means predicting the market is nearly impossible

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What chance do experts have of predicting the direction of the market this year when it faces the triple whammy of a continuing housing shortage, buy-to-let tax changes and the EU referendum?

If only the housing market had a crystal ball, we might claim to know for sure what effects the buy-to-let tax hikes, the EU referendum and the continued property shortage will have on demand and prices. Instead, we have a set of widely varying opinions from leading industry figures from which to make up our minds about the direction of the market in 2016.

Each of the three circumstances above could, on its own, cause problems for the housing and mortgage sector. But their conjunction this year – along with unsettled global economic conditions and long-held expectations of a rise in UK interest rates – has led some to fear major damage.

Few predict a fall in house prices in 2016 but there is a general air of uncertainty. Of course, the experts are not always right, as reinforced by the aforementioned predictions – as yet unfulfilled – of impending interest rate rises.

Buy-to-let
This is the first month of the new buy-to-let era following Chancellor George Osborne’s stamp duty increase for property investors, which he hopes will help first-time buyers by stemming property price rises caused by high demand from landlords.

Some experts predict a plummet in demand with a huge chunk of the market suddenly put off buying second properties. Anyone buying an additional home now faces a steep hike in stamp duty of 3 percentage points, unless the extra property costs £40,000 or less. A £275,000 buy-to-let property will incur tax of £12,000 – which is more than three times the previous stamp duty of £3,750.

When announcing his plans last year, the Chancellor said: “People buying a home to let should not be squeezing out families who can’t afford a home to buy.”

Landlords face a second hit from April next year when a cap on buy-to-let mortgage interest relief will start to be phased in. Eventually, landlords will be able to claim tax relief at only 20 per cent – rather than at their marginal rate, as now – meaning a steep rise in tax bills for higher- and top-rate taxpayers.

John Charcol senior technical manager Ray Boulger, one of the industry’s best-known figures, has likened this to a tax on turnover rather than a tax on profit.

He says: “This will have a big impact on activity as highly geared investors realise that the Chancellor has converted what may have been sensible pension planning to a permanent loss-making machine.”

If the tax rises were not bad enough news for landlords, last month the Bank of England’s Prudential Regulation Authority said clients seeking buy-to-let mortgages should face stricter criteria.

Instead of taking into account just the borrower’s rental income, it is proposed that lenders look at their wider financial situation as well, including costs incurred to rent out a property and tax liabilities, while any additional income to support the borrowing should be verified. In addition, lenders should consider whether a landlord could afford repayments if there was a 2 percentage point rise in interest rates.

The PRA acknowledges that many lenders conduct these checks already but it proposes forcing the rest to do so and crystallising these policies into the MCOB rulebook, much as the Mortgage Market Review in 2014 made compulsory what many lenders were already doing. The industry has been asked for its views on the PRA’s proposals, with the end of June as the deadline for responses.

Boulger says: “The joint attack by the Chan­cellor and the Bank of England on the buy-to-let market is likely to result in 2016 being the first year since 2010 when the percentage increase in buy-to-let lending hasn’t significantly outperformed that of residential lending.”

A slowdown in buy-to-let could create a  problem for the entire industry because the sector generates a large percentage of total lending. According to figures from the Council of Mortgage Lenders, 117,500 buy-to-let loans were advanced for house purchase in 2015, with a combined value of £15.6bn.

They accounted for 17 per cent of all mortgages for purchase, and for 13 per cent of the total value of £219.3bn. Hence if buy-to-let demand were to experience a slowdown the effect could be dramatic.

Some experts agree with the Chancellor’s theory: that demand from first-time buyers could assist overall lending in 2016 by making up some of the losses from buy-to-let.

Santander Mortgages head of business development Graham Sellar says: “The market turned out at £220bn in 2015, up from £204bn in 2014, and we expect it to be a little bigger in 2016.

“We anticipate that some of the stock usually bought by buy-to-let investors will be absorbed by first-time buyers and longer-term property investors, and that we’ll see more remortgage activity in both buy-to-let and residential, which will drive the market. “So the demand will be there but the mix of business may change.”

Online estate agent HouseSimple.com chief executive Alex Gosling adds: “With fewer buy-to-let investors snapping up properties from beneath the noses of traditional homebuyers, we could see a surge in first-time buyers.“Now that they’re fighting on a more level playing field, the drop-off in investor numbers could be replaced by first-time buyers.”

House prices
Boulger, however, questions whether first-time buyers will return to the market. He points to various surveys consistently showing that the biggest barrier to would-be first-time buyers is the high cost of deposits. Hence, he says, either house prices would need to fall drastically or the maximum LTV available from lenders would have to increase above 95 per cent in order for first-time buyers to surge back in to the market. As neither of these scenarios is likely in the immediate future, Boulger doubts Osborne’s claim that his buy-to-let crackdown will help first timers significantly.

Indeed, the first quarter of the year has exp­erienced strong growth in house prices. The latest monthly figures from Nationwide show the price of a typical UK home increased by 0.8 per cent in March while the annual rate of growth rose to 5.7 per cent – up from 4.8 per cent in the previous month and the strongest pace since February 2015.

Of course, the month of March experienced the main rush to beat the stamp duty price hike on second properties, pushing the average property value past the £200,000 mark to £200,251. Nationwide chief economist Robert Gardner says: “There has been a pickup in housing market activity in recent months, with the number of housing transactions and mortgage approvals rising strongly.

“This is likely to have been driven, at least in part, by upcoming changes to stamp duty on second homes, where buyers brought forward purchases to avoid the additional tax liabilities.

“This temporary boost to demand, against a backdrop of continued constrained supply, is likely to have exerted upward pressure on prices and helped to lift the pace of annual price growth out of the fairly narrow range of 3 to 5 per cent that has prevailed since last summer.”

Gardner adds: “The pace of house price growth may moderate again once the stamp duty changes take effect. However, it is possible that the recent pattern of strong employment growth, rising real earnings, low borrowing costs and constrained supply will keep the  demand/supply balance tilted in favour of sellers and maintain pressure on price growth in the quarters ahead.”

The Halifax house price index runs at a different trajectory from that of Nationwide but shows a similar upturn in March, recording a 10.1 per cent annual rise, up from 9.7 per cent in February. It reports an average house price of £214,811.

Boulger says: “A strong first quarter for house prices as a result of the stamp duty surcharge will be compensated for by a weaker second quarter and the stamp duty effects will continue into the third quarter.

“The reduction in buy-to-let activity will be broadly compensated for, as far as house prices are concerned, by the extended expectation of low interest rates, resulting in mortgage rates staying close to all-time lows for the rest of the year. Therefore, overall I am sticking to my original forecast that house prices will increase by 4.5 per cent this year.”

From a lender’s perspective, Santander’s Sellar expects similar house price growth. He says: “The market got off to a strong start in 2016 and we predict prices to rise by approximately 3 to 5 per cent over the year.

“When looking at UK house prices you also need to look at how markets are performing around the world. Glo­bally, there have been a few concerns around the health of the financial markets: oil prices falling, China’s economy slowing and the World Bank re-forecasting economic growth. Consequently, as an industry we have seen some national and international investors adopt a more conservative approach to buying property in the UK.”

While Boulger and Sellar expect demand to be sustained sufficiently to contribute to continued house price growth, some experts believe there is a chance it will fall off a cliff from April onwards.

When demand was soaring in February, Gosling said: “This could be the storm before the calm. It will be interesting to see what happens in April, which is historically a buoyant time for the housing market. “We are walking into the unknown – and there is a chance that demand will drop like a stone.”

Lending
Mortgage lending, meanwhile, shows a similar trend, albeit its statistics are published later than those of housing. The CML estimates gross lending in February of £17.6bn. This is less than January’s figure of £18.5bn but 30 per cent more than in February 2015, when the total was £13.6bn. It is also the highest lending total for the month of February since 2008, when gross mortgage lending reached £24.1bn.

Unsurprisingly, the trade body attributes much of the interest to landlords’ efforts to beat the stamp duty rise, although it expects demand to soften this month and beyond. CML economist Mohammad Jamei says: “While there may be a slight boost to lending before the 1 April tax changes in the buy-to-let sector, this is likely to be followed by a slight fall in activity. Affordability pressures continue to weigh on activity, as does the low number of properties coming on the market, although this has improved recently.”

EU referendum
Fears of a market slowdown are also being generated by the UK’s fast-approaching EU referendum, which will take place on 23 June. Some experts believe that growing uncertainty beforehand may have a negative effect on house sales while a potential Brexit could similarly influence prices for months, if not years, to come.

Mark Posniak, managing director of bridging loan specialist Dragonfly Property Finance, predicts a change in borrowers’ behaviour ahead of the vote on the UK’s membership of the EU. “It’s possible more homes may come onto the market in April because anyone considering selling may want to do so in advance of the EU referendum,” he says.

“As we edge closer to the vote and potential Brexit, caution among buyers is likely to rise and demand may taper off.

“Equally, with buy-to-let brought to heel and Brexit potentially looming, it is becoming increasingly hard to predict where prices are going next.”

Online estate agent eMoov.co.uk expects a 5 per cent fall in UK house prices in the event of Brexit. However, it believes this would be due more to subsequent uncertainty about the future among homeowners and buyers than to a reaction to Brexit itself.

“Should the UK public vote to leave the EU, we believe it could have a detrimental knock-on effect on the UK property market,” says eMoov.co.uk chief executive Russell Quirk.

“An air of uncertainty would lead to inaction among those looking to buy and sell, and the resulting dwindling demand would lead to a reduction in house prices. We believe they could easily drop by 5 per cent, maybe more, so the average UK homeowner could see their property reduce in value by £11,000.”

Capital Economics chief property economist Ed Stansfield disagrees. He says: “My view is the UK will do reasonably well whether we’re in or outside Europe.” However, he concedes a Brexit could make the UK, particularly London, less attractive to overseas buyers.

Housing shortage
A key contributor to the house price growth of recent years has been a chronic shortage of new homes, with demand far outstripping supply.

Housebuilding activity has increased in the past three years but is insufficient to meet demand given the growing population and the increase in single occupation. Government figures for 2014/15 show construction was begun on 166,900 homes – up from 160,800 the year before and a significant increase from 127,050 the year before that.

Nevertheless, these figures are well below the 233,880 new homes built in 2005/06 – the most since 1987/88 – and nowhere near the 250,000 new-builds that many experts believe are needed each year to keep up with demand.

The Government insists it is doing all it can to plug the gap. It points to announcements in the 2015 Autumn Statement where the Chancellor promised that the Government would deliver 400,000 affordable housing starts by 2020-21, including 200,000 starter homes and 135,000 Help to Buy shared ownership properties.

Legal & General Mortgage Club director Jeremy Duncombe is one of the many industry figures to criticise the Government’s new-build policy.

He says: “The country’s current housingshortage will only add to the affordability crisis we are experiencing across the UK. The Government’s plethora of housebuilding programmes over recent years fall far short of its own target of 250,000 homes a year.

“In order for the issue of affordability to be addressed in a meaningful and sustainable way, we need to see tangible results when it comes to confronting the supply-side deficit, instead of just further stimulus on the demand side.”

Sellar adds: “Affordability still remains a big hurdle in the residential space. With average incomes in the UK at around £25,000 a year and average properties at around £195,000, this will always be a challenge.

“The Government has introduced schemes intended to open up the market to those with lower deposits and these have in part been successful – but we need to build more.” Meanwhile, many in the housing industry point to an excess of red tape that they claim impedes the process.

Home Builders Federation executive chairman Stewart Baseley says: “The industry’s ability to increase output further will largely be dictated by the rate at which planning permissions are granted. If we are to deliver further increases in housing supply, it is imperative we speed up the time it takes for applications to be processed – to the point that builders can actually build.”

The housing and mortgage sector will always be influenced by factors beyond its control, whether economic, social, political or environmental. But this year’s unfortunate conjunction of the ‘usual suspects’ – in this case, unsettled global economic conditions and long-held expectations of a rise in UK interest rates – with the triple whammy of the upcoming EU referendum, the buy-to-let tax hikes and the continuing property shortage means experts may be forgiven, perhaps, if their predictions for the market this year fail to match the reality.

Housing market timeline

  • 2014/15: Latest Government figures show construction began on 166,900 homes, up from 160,800 the year before and from 127,050 the year before that
  • 2015: 117,500 of the 679,300 mortgages for house purchase were for buy-to-lets, making up 17% of the total and 13% of the £119.3bn value
  • February 2016: Gross mortgage lending reached £17.6bn, 30% higher than in February 2015 and the biggest February total since 2008
  • March 2016: Nationwide reports average UK house price exceeds £200k – up 5.7% YoY. Halifax reports 10.1% YoY rise, with an average price of £214,811
  • March 2016: BoE proposes clients who take out buy-to-let mortgages should face stricter criteria. Industry must reply to its consultation by the end of June
  • March 2016: BoE maintains the UK base rate at 0.5%, where it has stood since March 2009, marking seven years at its historic low
  • April 2016: Stamp duty hiked on second homes, up 3 percentage points on first-property stamp duty costs for properties more than £40k in value
  • June 2016: Referendum in which UK citizens will vote to either stay in or leave the EU
  • April 2017: Start of phasing of BTL mortgage interest shake-up. Eventually, landlords will be able to claim tax relief at only 20%, rather than at their marginal rate

Little reason to expect fundamental shift in key market drivers

martin ellis


Martin Ellis, housing economist, Halifax

Housing demand has been boosted over the past 12 months by improving economic conditions – continuing growth and rising employment – and strengthening household finances, assisted by rising real earnings for the first time in several years. Very low mortgage rates have also helped, and fell further during the past year.

The strengthening demand has combined with very low supply – of both new-build and secondhand properties – to drive strong underlying house price growth. As a result, the annual rate of house price growth has been within the 8-10 per cent range for nearly the entire period since the start of 2015, according to the Halifax house price index.

There is little reason to expect any fundamental shift in the key market drivers in the immediate future. As a result, the substantial imbalance between supply and demand is likely to persist, maintaining upward pressure on house prices.

Nonetheless, there are tentative signs that the supply situation may be beginning to improve a little. Instructions for secondhand properties coming up for sale have increased in each of the past three months and the level of housebuilding rose significantly in 2015.

Private-sector housebuilding completions in England last year were 20 per cent higher than in 2014, achieving the biggest annual total since 2008. However, they remain well below the level needed to match rising household formation.

With house prices continuing to rise more quickly than average earnings, it is increasingly difficult to get on the housing ladder. This ongoing development, accompanied by a possible further improvement in supply, could start to put the brakes on house price growth later in 2016.

While house price growth has been robust, activity levels have remained modest by historical standards. UK home sales totalled 1.23 million in 2015 – marginally higher than in 2014.  Sales picked up during the year and transactions in the second half were 6 per cent higher than in the same period in 2014.

The volume of mortgage approvals for house purchases – a leading indicator of completed house sales – increased by 5 per cent between December 2015 and January 2016.

Approvals, at 74,600, were the highest since January 2014.
A desire by buy-to-let investors to beat this month’s hike in stamp duty is likely to have helped to boost approvals in the early months of this year.

This is further supported by CML lending figures, which show a much bigger annual rise in buy-to-let lending than in owner-occupation. As a result, lending levels may drop back now that the tax rises have come in.

We do not, however, expect a marked impact on either sales activity or house price growth over the remainder of the year.