Supply & demand trends
Although activity in the prime London sales market was subdued over the first quarter, there was nonetheless a notable improvement compared to the last three months of last year. Applicant numbers rose by an encouraging 44% and new instructions were 39% higher, resulting in the quarter end available stock figure increasing by 6% compared to the previous quarter end. However, exchanges were down by a disappointing 20% and fall throughs were up by 11%. Data from Lonres additionally reveal that the ratio of sold properties to properties for sale fell from 11.9% in April 2014 to 7% in March 2015.
The majority of exchanges (41%) took place at the lower end of the prime segment (£500k - £1m). This was also the segment least affected by the slowdown with just 9% fewer sales recorded than in the corresponding quarter in 2014. The £2m and above segment has been the most affected by the slowdown, accounting for 8% of sales during the first quarter compared to 11% in Q1 last year while the total number of £2m and above sales was 44% lower.
The Conservative victory in the General Election will provide a significant confidence boost for owners of properties worth more than £2m as well as for investors who, respectively, faced the prospect of a Mansion Tax and rent control. Non-domiciles will be similarly relieved that their tax status will remain in place, albeit they will have to pay more for the privilege as announced in Budget 2015. This should hopefully alleviate the inertia which has plagued the prime London sales market so far this year and transaction activity should now increase. Indeed, we are already aware of several foreign investors who are preparing to acquire suitable assets in London. This should in turn trigger a steady but not excessive rise in property values in the order of 3.5% for the full year, rising to 5% in 2016.
We believe the Election result will have far less impact on the wider London housing market for owner-occupation, where affordability rather than taxation is the key issue. We maintain that average price growth will slow, due to reduced demand as mortgages become more difficult to obtain and deposits increase proportionately as prices rise.
There has been much discussion about whether the new pension freedom which came into effect in April will trigger a buying spree of investment properties. Given the poor performance of annuities in recent years and the low interest rate environment, the buoyant and expanding residential buy-to-let sector is likely to appeal to many DC pension holders as an investment choice. In 2004/05, 11.0% of the population in England rented privately – by 2013/14 this figure had risen to 19.4%. In London, the ratio rose from 19.4% to 29.6% over the same period.
Recent research suggests that 11% of people approaching retirement plan to buy a second home to rent out, compared to the estimated 6% of pensioners who currently own a buy-to-let property. If this turns out to be accurate, then a near doubling in the number of pensioners buying at least one investment property could exert inflationary pressure on house prices.
However, financing a property investment is likely to prove difficult for many 55+ year olds as lenders have been toughening their stance on borrowers who cannot repay their mortgage before retirement. Moreover, further regulatory tightening is anticipated within the requirements of the EU Mortgage Credit Directive and possibly also Basel III. Buying properties with cash is of course an option, but with the average pension pot in the UK standing at around £25,000 (double for married couples), the number of households with sufficient funds to enable the cash purchase of a property – the Land Registry reports an average London house price of just below £464,000 – will be very small.