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Expert Property Market Forecasts (2018)

What follows is an extended post collating a wide array of commentary from Property industry thought-leaders, who kindly took the time to reflect on the Market moving into 2018.

In addition to high-level insights into macro influences, price and rental trends, it is interesting to see the experts delve into a number of specific topics.  Examples include the notable demographic shifts occurring across the country alongside the real effects of the Universal Credit (UC) rollout, Local Housing Allowance (LHA) freezes and the widening risks of homelessness.  The continued evolution of the build-to-rent, property crowdfunding and online auction sectors have also been explored in some depth.

For higher tax paying private landlords, taking heed of the intensifying effects of Section 24 of the Finance Act is frequently mentioned, as are some useful tips to best prepare, and indeed capitalise, for what look set to be a turbulent few years ahead.

Please click on the links in the contents box below below to automatically scroll to the specific commentary link of your choice. You will also see an arrow towards the right which can be used to return to the top of the post.

The Property Investor’s Blog would like to thank all contributors for their input.

Chief Economist at the Royal Institute of Chartered Surveyors (RICS), Simon Rubinsohn

Chief Economist at the Royal Institute of Chartered Surveyors (RICS), Simon Rubinsohn“A key concern for the housing market in recent months has been the softer tone to transaction activity as affordability constraints coupled with the first hike in base rates in a decade and an increase in economic uncertainty has taken its toll on buyer appetite. The headline picture does, however, mask distinct regional variations with London and South East encountering a more marked challenge in this regard than the rest of the country.

The eye-catching announcement in the Budget of scrapping stamp duty for first time buyers could potentially provide a fillip for activity over the coming year but I am sceptical that the impact will be material with the benefit of the policy change being capitalised in prices before long.”

Simon Rubinsohn @RICSnews – Chief Economist, Royal Institute of Chartered Surveyors (RICS)

Chief Economist at Countrywide, Fionnuala Earley

Chief Economist at Countrywide, Fionnuala Earley“The outlook for the UK housing market is uncertain, primarily because of the Brexit risks and the effect that this has on confidence as well as on the pace of economic growth.

The latest economic forecasts from the Office for Budget Responsibility are probably a bit too pessimistic, but the prospects for growth are still weaker than we may have hoped for. That has implications for household incomes and the labour market which, along with interest rates, have the biggest influence on housing markets. But the interest rate environment will be supportive. Although rates will rise, it will be a slow process and unlikely to rise beyond 1.25% by 2021.

We expect GB house price growth to slow to 1% in 2018, but rise very modestly in 2019 and 2020. Price growth in the London and the South will be slower with a small fall in London likely in 2018. But outside of the capital price growth will be slow but positive.

The relatively benign outlook for prices is due to two main factors. First that we expect income growth to pick up from the spring as wage settlements factor in higher inflation. And second, the continuing issue with supply.

Despite the target to build 300,000 new homes per year, the lack of tailored supply in the UK housing market will support prices, especially in the areas closest to thriving local economies.  Stamp duty relief for first time buyers will make little difference to the overall level of activity, nor total average price growth, and government support to smooth the planning process to speed up new building will take a long time to come on stream.”

Fionnuala Earley @FE_Hamptons  Chief Economist at Countrywide and Residential Research Director at Hamptons International

Partner and Head of UK Residential Research at Knight Frank, Gráinne Gilmore

Partner and Head of UK Residential Research at Knight Frank, Gráinne Gilmore“The momentum in house price growth is slowing in many parts of the country, and we expect price rises to remain muted overall in 2018 amid increased economic and political uncertainty in the run-up to Brexit and amid more muted forecasts for wage growth. The market is localised and we see slightly stronger growth in the Midlands, East of England and the North West, a continuation of the trend that has emerged this year.

Once the Brexit deal is completed, we forecast rising momentum across the market, with price growth reflecting this in many locations. The variations currently observed in the prime housing markets in London and beyond are set to continue, and we explore this more fully in our blog.

The UK may now be entering a period of interest rate rises, but even so, we expect rates to be low compared to long-term norms by the end of the forecast period. While development levels are rising across the country, the shortage of new homes is unlikely to be fully reversed in the coming years, and that will underpin pricing.

On the other hand, factors such as deepening affordability pressures and property taxes, will continue to weigh on pricing.”

Grainne Gilmore @ggilmorekf – Partner and Head of UK Residential Research, Knight Frank

Manager at PricewaterhouseCoopers, Richard Snook

Manager at PricewaterhouseCoopers, Richard Snook“Recent research by PwC has highlighted the challenges faced by younger age groups seeking to get their foot on the housing ladder. The share of 25-34 year olds owning their own home fell from 50% in 2008 to 34% in 2016. It is projected to reach just 21% by 2025.

Raising a deposit is the greatest challenge, especially for those without family wealth to draw upon. Younger age groups face the mixture of declining real incomes, low interest rates received on savings, historically high house price to earnings ratios and reduced availability of high loan to value mortgages.”

Richard Snook @PWC_UK – Manager, PricewaterhouseCoopers

Director of Savills Residential Resarch, Lucian Cook

Director of Savills Residential Resarch, Lucian Cook“The summer budget of 2015 marked the point at which politicians sought to discourage buy-to-let investment through tax policy. And the squeeze continues as mortgage regulation spreads across both small-scale and portfolio landlords. Interest rate rises and progressive cuts in tax relief will limit investor opportunity.

According to UK Finance, the number of buy-to-let mortgages granted for purchasing a property was 75,300 in the year to the end of August 2017 –  47% lower than in the year to March 2016. The growth in the number of outstanding buy-to-let mortgages is lower still, at just 24,800, and there is evidence that some investors are shedding stock.

Irrespective of the support provided by the Bank of Mum and Dad and Help to Buy, little has changed for the deposit-constrained first time buyer and the demand for rental stock will continue to grow.

Cash investors, however, remain far more active. The quarterly stamp duty land tax statistics suggest that in the year to September 2017, the additional 3% surcharge was paid on 245,000 purchases.  While some of these will be second home purchases, people buying for other family members or people buying their new home before selling their old one, the majority will have been investment buys.

Looking to 2018 and beyond, the decline of the mortgaged buy-to-let investor will open things up for the growing multifamily or build to rent market, led by the likes of Sigma and institutions such as L&G, M&G, and LaSalle, who have contributed to the delivery of more than 17,000 units so far.”

Lucian Cook @LucianCook – Director Residential Research, Savills

Editor and MD of The Property Investor News, Richard Bowser

Editor and MD of The Property Investor News, Richard Bowser“The recent, much awaited conclusion to the first stage of the Brexit negotiations has been greeted with a sense of relief by many business owners and property professionals, albeit this is just the first stage in the protracted ‘divorce’ negotiations. In the last eighteen months the London economy and its housing market has seen a cloud of uncertainty hang over the capital as sentiment weakened with the burden of increases in stamp duty not helping matters. Some EU nationals have voted with their feet and left the UK to seek employment in locations which may offer a warmer welcome than the UK. With net inward migration lessening, the acknowledged skills shortages in the building and construction industry are unlikely to improve and build costs are increasing not helped by the decline in sterling.

Transaction volumes have reduced as buyers have held off from land and property purchases given the less certain outlook ahead. In the regions however, particularly in the Midlands and North, buyer confidence had seen steady growth in average property values in many localities and this trend looks set to continue into 2018. Property developers in the Greater London area now need to widen their margins when doing a viability assessment on potential deals given the likelihood of a longer sales period and with many ‘off-plan’ buy-to-let investors being deterred by the effects of the Section 24 tax changes.

Build to rent continues to appeal and the roll out seems set to increase, particularly in some regional cities.”

Richard Bowser @PIN_Magazine – Editor and Managing Director, Property Investor News Magazine | See the PIN Magazine’s YouTube Channel Here

Founder & CEO at Realyse (Housing Market Intelligence), Gavriel Merkado at Realyse

Founder & CEO at Realyse (Housing Market Intelligence), Gavriel Merkado at RealyseMarkets for 2018: Our research has shown that real estate markets are auto-correlated, and so we can expect that next year will be somewhat like this year. Modest volumes and modest price changes. The supposed meltdown inspired by the Brexit vote failed to materialise, and contrarily, stock markets are up, yields are down, and real estate prices have more than recovered past their pre-Brexit vote levels. However some hazards may yet present themselves to the property market, with records high prices putting a strain on affordability, as well as changes in interest rates.

Technology for 2018: The plethora of new technology solutions to real estate problems will continue to expand as companies and users move along the adoption curve, from ‘early adopters’ into the ‘early majority’. Most companies and users will find it hard to choose which product or service to engage with, setting up a scene for consolidation in late 2018/2019;

World Cup 2018: Our view is that Italy will win, based on the very strong opinion of our lead back end developer. This may result in enthusiastic buying of properties in central London and Bedford, which statistics show have relatively higher proportions of Italian residents! (That one is a joke! But who knows, it might happen!).”

Gavriel Merkado @REalyse_UK – Founder & CEO, Realyse

Property Expert, Henry Pryor

Property Expert, Henry Pryor“2018 will be more complicated than 2017 and the potential icebergs are bigger but the opportunities will be significant for those investors who take their time before plunging in. The buy-to-let sector is already soaking up huge changes both to tax and regulations but there are more consultations underway and the political appetite for more support for tenants looks set to continue.

Yields in parts of the country look too thin by longer term standards. I still think property needs to deliver 6% or more but many looking to participate are mistaking speculating with investing. Both are fine but there are important difference. Investing delivers a dependable yield. Speculation is more like gambling hoping for capital appreciation.

2018 may well expose those who bought assuming prices would rise ‘because they always have’ but more savvy buyers will look to balance risk and reward. I expect that these are the people who will lay down the foundations of their future property fortunes.”

Henry Pryor  @henrypryor – Property Expert

Land, Planning & Development Expert and CEO at Millbank, Paul Higgs

Land, Planning & Development Expert and CEO at Millbank, Paul Higgs“There are various approaches to property development and business in general. Personally speaking, I never really worry too much about what is happening in the market. Obviously, developers need to keep an eye on where things are heading – but the truth is that no one really knows for sure. There are always people calling the top and the bottom of the market. Most of the time they are wrong but every now and then someone is bound to get it right. It goes back to the adage that “even a stopped clock gets the time right twice a day”. Sometimes people get things right by virtue of the law of averages and they’re then deemed as geniuses.

I’ve experienced 2 major property crashes and a number of smaller ones in my career – sometimes I’ve had a feel for the way things would turn out which have proven correct and other times it’s been a surprise. Based upon what I think is happening (or going to happen) in the market I’ll adjust my strategy slightly. For example, as we approached the EU referendum, I had no idea which way the vote was going to go (and was surprised that the UK decided to leave) but did however anticipate that a severe economic shock could ensue which would impact upon buyer sentiment. As a result, I changed my approach slightly and made sure I wasn’t building-out and selling anything and started trading my sites with planning permission instead. Note that I didn’t change my strategy entirely but simply adapted to the market as best I could.

My priority is always to look for real off market opportunities where there is little competition from people that do not know what they’re doing bidding the prices up. Furthermore, I always aim to add significant value to any scheme through my detailed knowledge of planning. Whether the market is going upwards, downwards or sideways, identifying the right opportunities and adding value will never go out of fashion. Of course, crashes happen – but when they do, provided you have prepared correctly and created a significant uplift in a deal before you have started, then you have a buffer in place to handle the downturn. When the market goes up, it’s an added bonus.”

Paul Higgs @Paul_Higgs1 – Land, Planning & Development Expert at Millbank Land Academy and CEO at Millbank 

CEO at Inspired Asset Management and Inspired Homes, Martin Skinner

CEO at Inspired Asset Management and Inspired Homes, Martin Skinner“Recent progress in the Brexit negotiations, plus the stamp duty discount for first-time buyers should both provide a much needed boost to the market once the seasonal slowdown has passed. Mortgage rates close to all time lows; Help to Buy; the Lifetime ISA (where the government tops up £4,000 of annual savings with a further £1,000); and the stamp duty changes all combine to make it easier than ever for first-time buyers to purchase a new home. In fact, we’ve worked out the mortgage repayments of our Help to Buy purchasers are nearly half the cost of renting the same apartments.

I expect sales of new homes to owner occupiers – particularly first-time buyers – to pick up significantly during 2018. I also expect buy-to-let investors to trickle back into the market as they take advantage of Limited Companies to retain finance cost (mortgage interest) relief. An increasing number of Limited Company buy-to-let mortgage products are now available and competition between lenders is driving interest rates lower.”

Martin Skinner @MartinSkinner – CEO, Inspired Asset Management and Inspired Homes

Co-Founder of the Property Developers Academy, Brynley Little

Co-Founder of the Property Developers Academy, Brynley Little“In our opinion 2018 is going to bring plenty of opportunity. With the market softening in most areas, us as developers are firmly in acquisition mode. Our main focus is looking at the lower end of the market and acquiring sites suitable for social and affordable housing, with an eye on the long term by holding the units rather than trading. Higher value sites carry more risk in the current climate.

Obviously there has been a lot of emphasis on increasing housebuilding in the UK, with a target of building 300,000 new homes a year by 2020. The last time this level of housing was produced was in the 50’s and 60’s, where land was not sold competitively.

The Government have committed to boost the supply of skills, resources and land over the next 5 years through capital funding, loans and guarantees, such as the Home Building Fund, and the Housing Infrastructure Fund to enable SME developers to play a bigger part in UK housebuilding. Time will tell as to how effective this will be for SME developers.

Changes to developer contributions, releasing strategic sites, an increase to compulsory purchase powers, improvements to the planning system, and government funding are just some of the things that are under further consultation, and in some cases already going ahead. It seems as though there is a lot of joined up thinking for the first time in a long time. To take advantage of the opportunities 2018 is going to bring it is paramount to understand the development business and start, or scale your business from a solid foundation.”

Brynley Little – Co-Founder of the Property Developers Academy

Director of Real Estate Policy at the British Property Federation, Ian Fletcher

Director of Real Estate Policy at the British Property Federation, Ian Fletcher

“We’ve been delighted with our 3rd quarter (2017) figures which showed close to 96,000 build to rent (BTR) units in various stages of the development pipeline. We have been waiting for a number of these units to come to fruition – but there are approximately 17,000 units that are now delivered. 2017 trends have seen far more BTR activity in the regions, stretching out from the core cities to a number of secondary locations across the UK including Aberdeen, Glasgow, Dundee, Southampton, Leeds, Norwich and Cardiff (see our interactive map here).

We’re noticing a growing trend of BTR developments appearing in university towns as there is a ready-made market for quality rental products – predominantly for young graduates who have become accustomed to higher-quality, purpose-built student accommodation. The more units that come into the market, the better as we will be able to see the operational realities of these schemes – especially through gaining insights into tenants’ perspectives and other feedback.

We were also encouraged by the contents of the Housing White Paper, which formally recognised BTR in national planning policy. Looking into 2018, we should see the final “blocks” of government policy come into place. We need to see this progress quickly, as a big challenge for many of our members is that many local authorities still struggle to embrace BTR conceptually. A national vision, embraced by local governments across the country, will certainly help the sector move forward.”

Ian Fletcher @BritProp – Director of Real Estate Policy, British Property Federation

PRS and Build to Rent Consultant, Richard Berridge

Who Needs Friends? Build-to-Rent: The Differentiator

PRS and Build to Rent Consultant, Richard Berridge“A short while ago I was talking through a client pitch with a colleague at PRSim and the conversation moved on to the topic of customer retention. He asked me about something he’d heard to be true but he wasn’t able to uncover the source. The ‘something’ went a bit like this… “If a resident were to make a friend with another resident renting in the same block, they’d be 25% more likely to stay longer, if they made two friends, 50% more likely’ Or something along those lines.”

Since I’m supposed to be the build to rent guru, I’d know the source of that research right? Wrong! I’d heard it before, it’s oft quoted (with variations) but it’s apocryphal. So I got on the guru hotline to guru mates in the sector and asked them what the source was… Incidentally, on a bit of a diversity theme, all the mates were women. Tracey Hartley of Howard de Walden, Alex Notay of Places for People, and Lesley Roberts of Allsop. All brilliant…  None us knew of any empirical evidence to support the ‘friends stay longer’ assertion, but we’d all heard it.

So where did it come from?  Well, eventually we agreed that it was something we had all heard at a conference some 3-4 years ago.  Although we couldn’t remember which one… It’s an age thing.

So that meant hitting Google with as many relevant key-words as possible, dredging up and poring over academic sector research to find… nothing of substance.  Except one article from the National Apartment Association of the US. And, paradoxically, not from four years ago, but August 2017.  The article can be read here.

Now, whilst the article doesn’t directly address the ‘friends stay longer’ maxim it does identify the importance of curating friendships in ‘multi-family’ environments; or BTR as we’d call it in the UK. Why is that important? Simply, apart from creating a new asset class, the sector is determined to change the way ‘tenants’ are treated in the UK. So much so, the word ‘tenant’ is banned in many BTR organisations; they are customers or residents. Each of whom spend the major part of their net income on a place to lay their hat. All of us recognise great customer service when we receive it, mostly in trivial circumstances. So why wouldn’t we expect even greater care to be taken of us if we’re spending significantly more?

The drive to improve the customer’s lot is not entirely altruistic. It’s also Net Operating Income (NOI) driven. That’s not to say that the lot of the ‘tenant’ has gone unnoticed or is irrelevant. I think we all recognise that the system of renting a home in the UK is broken and has been for a very long time, and the PRS has been muddling along with ill-timed government interventions here and there.

Many of us in the BTR sector see this new asset class as a catalyst of change, and, for those of us who have been looking to completely change the way we do business with renters, as something that can now be justified, not just by recognised benefits great customer service brings, but also by the increase in NOI.

What that short article on the NAA website tells you is that there is no landlord/tenant adversarial relationship in BTR thinking. It’s about creating great places to live, enriching the lives of people living there and building long term relationships with your customers.

Don’t underestimate the power of ‘happiness’ in a BTR environment.  Triggering the ‘happy brain chemicals’ encourages social interaction, positive relationships, favourable feelings and creates a receptive environment where people make friends. And all of that means residents are more comfortable, more settled and more content.  Happiness has a wider impact on your business, your reputation and your brand. Not only will you keep customers longer, you’ll find people will want to be customers of yours, and that really is a happy situation to find yourself in.

So, to answer the question ‘who needs friends’, we all do. Apart from the joy friendship brings, curating friendship benefits the bottom line, improves the heart and soul of the operational business and makes everyone happy.”

Richard Berridge @ResiRichard – Blackbird Real Estate Consultants | Private Rented Sector & Build to Rent

Director at Simplify Property, Alan Frost

Director at Simplify Property, Alan Frost“The last couple of years have certainly been tough for property investors and developers. The natural slow-down of the market is one thing, but the Government’s attitude to landlords in particular and small to medium operators in general created plenty of headaches, hassles and more.

However, wherever there is a challenge there is an opportunity, and I believe 2018 will be a good year for those who discover opportunities and strategies that are out of the reach of the joe public. The fundamentals for the property market – supply and demand – are still strong, and as a long term, income generating asset there are few better alternatives. If you can work the opportunity harder and earn more income then even better, but naturally that will more time, energy, and better support structures and power teams.

For those looking to start or grow you need support from professional experts with plenty of industry experience – the vanilla buy-to-let, bought at market value, is no longer good enough. Fortunately, people like ourselves are offered through our contacts and network much better deals even for beginnings, and if you can work in partnership even better.

Short term strategies reliant on adding value (such as flipping) will struggle because the market is struggling. However, more creative solutions will find more success. Multiple exits will be key, and sourcing good deals will be extremely important. There will not be any help from the Government for us, so we need to create opportunities ourselves.”

Alan Frost @SimplifyProp – Director at Simplify Property

Director at Just Do Property, Julie Hanson

Director at Just Do Property, Julie Hanson“The property market in 2018 is set to weaken caused by various factors:

  • Uncertainty in the market caused by Brexit;
  • Mortgage Constraints – this will have an impact on the amount that investors are able to borrow;
  • Rising interest rates – interest rates have started to rise and will continue to rise gradually, this will increase the cost of borrowing;
  • New taxation rules.

The above factors will certainly make investors more cautious in the short term. However, a low supply of stock means the market will continue to grow.

Estate agents Savills forecast in November that national house price growth will slow by half, growing only by 14.2%. Countrywide, the biggest agency in the UK, thinks prices across the country will go up by 2% in 2018, and Savills and JLL both predict a rise of 1%

The Nationwide Building Society reports that property prices have risen by 2.5% over the past year.

New BBC data shows that house prices are lower now than they were ten years ago in 58% of neighbourhoods in England and Wales.

In the North-East house prices in real terms have gone down in 95% of wards, and it’s the same story in Wales.

By contrast, house prices in London have gone up in 99% of all neighbourhoods in the last decade. However, Savills predict that house price growth in London is likely to be more constrained than the rest of the country by the factors above. In posh prime central areas, Strutt & Parker estate agency gives two scenarios: at best, prices will be static, but at worst they could plummet by 5%, depending on wider economic influences. Gloomier still is its warning that prices in prime central London could stagnate for several years.

Property isn’t always a good investment – unfortunately it’s no longer true that all house prices double every 7 years, despite what it used to be!

It’s going to be a bit more difficult to make money in property in the next few years, however if you are a savvy investor this is the time to pick up some bargains! If you do your research and due diligence, then there are some great property deals to be found. Property continues to be a great investment vehicle if you are an educated investor.”

Julie Hanson @JustDoProperty – Director at Just Do Property

Senior Economist at UK Finance, Mohammad Jamei

Senior Economist at UK Finance, Mohammad Jamei“Several different factors are weighing on buy-to-let house purchase activity. Lenders tightened affordability criteria ahead of the Prudential Regulation Authority’s stress tests, which came into effect at the beginning of 2017, and the tax relief changes began to take effect from April, the first stage of a four-year transition. These two changes, along with the change in stamp duty for additional homes means buy-to-let house purchase activity has been flat since June 2016.

There is still uncertainty in how landlords will react to the income tax changes. We have not seen any sudden contraction in lending as a result, but expect landlords to become more cautious and will likely limit their ability to re-leverage their portfolios. Our forecast for buy-to-let remortgage activity is that it continues at its current pace over the next two years.”

Mohammad Jamei @mjjamei – Senior Economist, UK Finance

Editor at Letting Agent Today and Estate Agent Today, Graham Norwood

Editor at Letting Agent Today and Estate Agent Today, Graham Norwood“Buy-to-let is clearly more challenging now than at any time during its history – but that in itself is not a reason for avoiding it. It sounds like a cliché but that doesn’t mean it isn’t true – choose locations where jobs and transport are still strong, go for secondary locations where capital values are reasonable and so rental yields will be good; and make the investment for 10 or 15 years so you have a chance of reasonable capital appreciation.

Furnish, equip and maintain your buy-to-lets well, and ensure it’s managed by a strong letting agent, because Build To Rent is coming to a location near you soon, and you need to compete with it.”

Graham Norwood @PropertyJourn – Editor at Letting Agent Today and Estate Agent Today 

Founder at The Property Voice, Richard W J Brown

Founder at The Property Voice, Richard W J Brown“My main focus is in the residential property market, where I see a mixed bag for 2018. The Government has introduced policy changes and incentives aimed at encouraging or discouraging certain behaviours among selected groups…and incentives do tend to work! Some Housing Associations have been given additional borrowing powers, and developers or institutions are being encouraged in a variety of ways to build more homes to sell or rent. First-time buyers have a helping hand in the form of the Help to Buy Loan and ISA along with the recent stamp duty stimulus. Meanwhile, disincentives and tougher lending criteria for private landlords has led to a greater burden on those that use finance in particular. All of this with the backdrop of weak economic performance and the dark cloud of uncertainty surrounding Brexit. Adding all this up, in 2018 I see small wins for first-time buyers, developers & institutional investors and cash-buying investors. I see elements of struggle for existing homeowners and conventional private landlords, whilst more professional or corporate landlords and investors adapt and hunt down higher yields, added-value opportunities and tax-loopholes!

In conclusion, more development starts, if not completions, and a shift in the balance of purchasing power from finance-backed private investors to first-time buyers, cash investors and corporates. The housing market will see it’s better price growth, probably in the regions more so than in central London, unless a good Brexit deal emerges. Fundamentals, such as modest growth in rent and mortgage affordability through wages, will probably keep a lid on prices and rents at below long-term average growth rates. Therefore, the best investment opportunities lie beyond vanilla buy-to-let and instead with development, and a more professionalised approach of, tax-efficient business structures, higher-yield strategies and an value-added approach such as ‘forcing the appreciation’. My personal focus is very much on the professionalised approach to property investment this year.”

Richard W J Brown a.k.a The Property Voice @PropertyVoiceUK | Listen to the podcast here.

Director at IPS Estates, Adam Lawrence

Director at IPS Estates, Adam Lawrence“As we come to the end of another calendar year, there lies before us another year of uncertainty it seems. We’ve seen bucket loads of wrong predictions (well, it is a mugs game), and markets flying in the face of what experts have been saying for some years now. However, in 2017 we’ve seen a long-awaited correction in the market in London and the South East of the UK.

On the flip side, the northern side of the north-south divide has been the beneficiary of this, as money finds the home that it needs, with the “buy for yield” investment market in the south having been killed stone dead by recent changes in stamp duty, personal tax around property investments, and new mortgage requirements and restrictions on portfolio landlords and on all buy-to-let investors.

As investors it is best to remove all emotion from the situation and look at the facts – the facts are that Mark Carney and the Bank of England have stated the objective for some time to cool the buy-to-let market down. They have, remember, at their core a significant problem – money is too cheap. You can borrow at tiny rates to invest in property, often heralded as a safe asset class, and still achieve excellent returns by buying properties that yield well.

To solve that problem once and for all, they need to get interest rates back to “normal” levels. These days, we have forgotten what those are! Historically, the UK mortgage rate before 2008 was 6%, and the historical average base rate was 5%. Since of course we have only seen mortgage rates falling and falling to a 2% average for 2 year-fixes, and base rates at 0.5 and 0.25% – a true step change.

The Bank of England still talk about a “new normal” for the next decade of 2.5% base rate, occasionally, when they do release anything on this subject. One does need to be careful, because often they release titbits of information in order to shape expectations and markets, but this does seem like a reasonable target given the damage that was done in 2008 which simply has not been repaired as yet – the gigantic airbag that is Quantitative Easing, and Zero Interest Rate Policy, is bound to take a long time to unwind.

We’ve seen the Bank take a different approach to try and cool the housing market. Overall this should be seen as a positive step to try and cool boom and bust – most investors don’t see it this way of course. It takes a particularly dispassionate viewpoint. The Bank, ultimately, have been successful. However, the drop in Sterling has meant the UK, a traditional bastion of security for money around the world, has become a bit more attractive. Another drop would make the UK even more attractive for money from North and South America, and Asia – £100bn of which flowed into the capital to buy property between 2010 and 2016.

London will always be attractive to such investors who are not looking for returns but for security; however, Manchester and Birmingham are now firmly on the radar as cities where investment property can and should be purchased. Flats are purchased at the ratio of 3:1 versus London prices, with stronger yields, and at the moment, vastly superior capital growth. These trends of 8%+ a year capital growth cannot continue of course, but I was saying similar things about the London market in late 2014/early 2015 and there was another year of rampant growth after that. If anything, it also feels like Birmingham and Manchester are earlier in the cycle than London was at end 14/early 15.

The big question that comes from the Bank’s tactics however, is, how effective do they really want them to be? There is gigantic uncertainty around Brexit and the fact of the matter is that people are now not coming to the UK in the same numbers – some industries including banking are seeing a net outflow of talent. This has to have an impact on the demand side for expensive property in the South East.

The Bank has tools at its disposal to get that market moving again – if it decides that a stagnant London market is not desirable. It may however consider that an elongated period of flat prices in London is exactly what it does want, while inflation charges away at the 3% mark.

All of this high-level rhetoric does, of course, need to lead to some projections, and here are mine:

London market – capital values to be flat, best guess 0%

South-east England – flat/small growth, in the 1-2% region

Midlands regions – growth in the 5-7% region

North West – growth in the 3-5% region

Wales – growth in the 3-5% region

South-west – growth in the 2-4% region

North-East – growth in the 2-4% region

Interest Rates – one rise to be implemented in the latter half of the year, although a strong possibility there will be no rise. I am primarily basing this on the journey of the interest rates in the US (who are ahead of the UK because they took more pain more brutally post-08), and the forward pricing of interest rates in the UK. 55% likelihood one rise of 0.25%, 35% likelihood no rise, 10% possibility that rates need to go up more than 0.25% (Brexit uncertainty primarily, and uncertainty around inflation control).

Unemployment – to remain steady, 2018 will be a year where few firms want to move too quickly, that will apply to hiring and firing, but outside of the capital, regional industries are recruiting. Brexit and the weak exchange rate is good news for traditional industries, manufacturing is up 3.6% in 2017 thanks to Brexit, and the more traditional the locale, the better off that Brexit could potentially make them on a regional level. This is why I am particularly bullish on the Midlands areas, there are plenty of primary/secondary businesses that look more viable than they have done for some time (as long as they are not having to import too much at inflated prices!)

Crash? Unlikely, although there is a really significant probability of an unseen event at this time, due to the levels of uncertainty and the unknowns involved. An election has to remain a possibility which is unlikely to help, and until more is known about a trade deal we will not understand whether inflation could potentially reach 5% or more and action would then surely have to be taken by the Bank, regardless of how temporary that inflation may be.

Credit Crunch – I see this as extremely unlikely, because the lessons learned in 2008 were “don’t let the credit dry up!” – asset prices are accused of being overvalued, although a lot of the FTSE 100 is denominated in non-UK currency in non-UK domiciles these days, so that argument is a tougher one to follow – cheap money does of course mean asset inflation, but properties or commodities could go either way as money races into “safe havens” if the stock market does have a bigger wobble. If anything, both the UK and the US currently have (in theory) pro-business governments, and thus the markets should be relatively calm at their current levels. I’d be surprised to see an 8000 FTSE, but I’ve been surprised before.

Cryptos – can’t resist a quick mention, I have to take this opportunity to go on record and say I think it will be possible to buy bitcoin in 2018 at below $5,000. Perhaps even below $2,000. This is a ramp unlike many others, an unregulated market, and there are tales of people remortgaging houses to get involved, and putting their life savings in. These sort of tales always end one way – even if we see $30,000 or higher in the new year, the music cannot go on for too much longer.

That’s it – my neck is on the line! Be gentle with me when I’m wrong…”

Adam Lawrence – Director at IPS Estates

Chairman at Acadata, Peter Williams

Chairman at Acadata, Peter Williams“Acadata produces an independent monthly house price commentary published as the LSL /Acadata House price Index for England and Wales (see here). A separate index is published for Scotland. The Acadata index has been published since 2003 and includes both cash and mortgaged transactions. Through 2017 we have commented on the ebb and flow of the market noting the slow decline in prices, led by London. Acadata does not forecast house prices, it reports in detail, on current trends in prices and transactions by country, region and local authority, but we do take a forward view informed by other market commentary.

Looking ahead to 2018 we would see the slowing continuing reflecting both modest wage growth, rising interest rates and the general decline in consumer confidence.  House price inflation in 2018 is likely to be in the region of 1% albeit with strong regional and local variations then rising to around 2% in 2019 and this is very much in line with other commentators who then see acceleration through 2020 onwards.  We would take a more cautious stance on this given recent commentary on diminished wage growth and interest rate trends (not least as the Bank raises rates and withdraws from the Term Funding scheme) but we recognise that the demand and supply imbalance continues and this in turn generates price pressures.   Our expectation is that transactions will remain flat at around 1,200,000 per annum for the two years and that the market will be well supported by good mortgage availability and pricing.

The OBR has recently published its housing supply forecast showing increased output up to 2021, with the government coming close to meeting its supply targets. Aside from the uncertainty surrounding Brexit and the what happens to Sterling – itself quite a key driver in terms of foreign investment in the UK property market – we have the added unknown of what happens to the Help to Buy equity loan scheme post 2021.  This has been an important prop to housing output and to increased first time buyer access to the market. Getting clarity as to what happens post-2021 is going to be an important conditioning factor in terms of prices and transactions for 2022 onwards.  The recent stamp duty changes are themselves not an inconsiderable boost to the market with government estimating that some 205,000 first time buyers will benefit in 2018/19, though the number of additional households who could not otherwise have bought is likely to be much smaller.

As this suggests, there are multiple effects working through the market and which will find expression over the next two years. The fan diagram of uncertainty is very wide. What is very clear is that there is no likely market collapse even though we are some way through the normal property cycle and that the most likely prospects for 2018 and 2019 are for more of the same.”

Peter Williams – Chairman, Acadata

Chief Executive at the National Association of Estate Agents (NAEA), Mark Hayward

Chief Executive at the National Association of Estate Agents (NAEA), Mark Hayward“It’s been a big year for the housing market, with the Government pledging to improve the house-buying process, and stamp duty relief for first-time buyers coming into effect. However, looking ahead to next year, more than half of our members don’t think the FTB tax relief will have a real impact on the number of sales being made to the group.

Further, agents expect supply to remain the same but demand to grow which sounds like bad news, but if we can improve the process of buying a property, we’ll be making vast improvements to the sector which will ultimately make it easier and provide more certainty for FTBs.

Our members want to see stamp duty relief rolled out nationally to all buyers, and hold out hope that housing stock will increase. This will be a case of ‘wait and see’ – the Government has made many such promises in the past which we’ve never seen translated into reality.”

Mark Hayward @NAEA_UK – Chief Executive, National Association of Estate Agents

Founder and CEO of eMoov.co.uk, Russell Quirk

Founder and CEO of eMoov.co.uk, Russell Quirk“The UK property market has weathered the storm of the Brexit vote, snap election and various other changes in legislation over the past year or two, and for the large part, come out the other side unscathed.

While price growth patterns have been turbulent, we’ve seen a degree of stability return to the market over the last few months and once the seasonal lull has passed, we believe the market will continue to find its feet in 2018, with prices growing at a slow but steady rate, up around 5% annually.

While London has been hardest hit of all, the capital remains an attractive proposition for home buyers and a 3% increase in property prices over the coming year is probably a realistic expectation.

Changes to the buy-to-let market have certainly looked to dampen the appetite of aspiring and existing landlords in terms of building out their portfolio. While an increased rate of stamp duty might dampen this demand marginally, the buy-to-let sector remains a lucrative proposition and it is unlikely we will see this practice fizzle out completely.”

Russell Quirk @RussellQuirk – Founder and CEO, eMoov.co.uk | Up-front fee and sold options available (see packages here)

Head of Policy at the National Landlords Association (NLA), Chris Norris

Head of Policy at the National Landlords Association (NLA), Chris Norris“We expect landlords’ costs to increase in 2018 mainly due to the tax changes, although the recent interest rate rise could also add an extra £20 a month to interest payments for every £100,000 of outstanding finance.

While the impact will depend on individual circumstances, many existing landlords who currently rely on finance to fund their portfolio may have to choose between selling up or increasing rents.

Rental property can still be a worthwhile investment in 2018, and we expect new landlords to continue to enter the market, but the increased taxation of the sector, the three per cent stamp duty surcharge on additional property purchases, and potential further rises to interest rates means it will become increasingly difficult for anyone considering their first steps.”

Chris Norris @NationaLandlord – Head of Policy, National Landlords Association (NLA)

Chairman at the Residential Landlords Association, Alan Ward

Chairman at the Residential Landlords Association, Alan Ward“From an investment point of view, April will see further changes to mortgage interest relief, and there will possibly be more mortgage rate increases during the year – although the market is still fairly fluid.

Landlords overall don’t tend to be buying at present – whether that will continue depends on borrowing. Those landlords with bigger portfolios tend to be more inclined to buy, those with a smaller number of properties seem to be staying where they are.”

Alan Ward @RLA_News – Chairman, Residential Landlords Association

Spokesperson from Axe the Tenant Tax, Jamie Fraser

Spokesperson from Axe the Tenant Tax, Jamie Fraser



This post first appeared on PS Investors, please read the originial post: here

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