Despite this, and a slight resurgence in UK house building fuelled by strong off-plan sales in London, the UK is still not building enough new homes to keep pace with demand. The Town & Country Planning Association has calculated up to 245,000 new homes are needed every year until 2031 to satisfy projected demand in England but in the past ten years, only around 133,000 have been completed each year. The pace of new home development in London did pick up in 2015, however. The total number of homes started in the first three quarters of the year (26,000) was 4.4% more than the total starts in 2014; just under a quarter of these were office conversions.
The change from a 'slab' to a progressive system for Stamp Duty introduced at the end of 2014 slammed the brake on sales activity in the prime sector. Price reductions were up considerably, and sales of homes at £1m and above in the first eight months of the year were almost 20% lower than in the corresponding period of 2014, while transactions at £1.5m and above were almost 30% down.
Overall, buyers struggling to raise the required deposit to meet standard loan-to-value requirements were largely to blame for the 21% decline in completed sales over the first eight months of 2015 compared to the corresponding period of 2014. Even with a 95% mortgage, the average deposit required is now just north of £25,000, beyond the means of many first-time buyers.
Annual price growth at national level slowed during the year from 6.7% in January to a low in August of 4.2% before accelerating to 5.6% in October, according to the Land Registry. A similar trend was seen in London, where annual price growth started at 12%, dipping to 6.6% in August then recovering to 10.6% in October. Within London's prime sector, the stand-off between buyers and sellers on price meant they remained supressed in most areas. The Chestertons Prime London Residential Sales Index showed a fall in capital values over the year to end of September of 2.4%.
Let's start with the positives: the economy is forecast to expand at roughly the same rate as this year (2.4%) which will be above the average for the OECD economies; average earnings growth is forecast quicken to 3.3% and real household disposable income is also projected to rise at a healthy 2.5%.
However, various government policies risk destabilising the market in 2016. Perhaps the most controversial news of 2015 related to what appears to be a concerted effort by the Government to drive small buy-to-let landlords out of the market by:
Landlords facing increased operating costs and may respond in one of two ways – either they will leave the sector, resulting in a reduction in the number of homes to let, or they will increase rents – it's a lose-lose for tenants either way, and will have the knock-on effect of making it even more difficult for many renters to raise a deposit to buy a home. This impact will be keenly felt in London, where the difference between average rents and those in the rest of the UK is now a record 156%.
The aims of the Prime Minister's "Generation Buy" policies are laudable, but "Generation Rent" is still growing. The share of privately rented households in the capital has grown from 18% a decade ago to 27% (31% in Inner London). Will it ever match 1960s levels, when 45% of Londoners rented?
Prime sales, especially in London, will be dogged by the gap between the price sellers hope to achieve and the sums buyers are willing to pay, especially given the punitive amounts they must pay in Stamp Duty – price reductions are likely to remain a feature of many transactions. The new homes sector is likely to slow at the higher end, but demand should stay strong at mid to lower price points.
We forecast prime rental growth will accelerate to 2.5% in 2016 (from zero this year) as demand rises. Rental growth in the wider market will be stronger and driven by population growth and affordability issues in the sales market, which will be exacerbated when interest rates rise.
The prospects for prime price growth in London are limited in the short term, and depend on how overseas buyers react to changing conditions –instability can act as a brake on outward investment, but can also trigger capital flight and London remains a leading safe haven. We anticipate prime price growth next year will improve marginally to around 2%. Price growth in the wider market will be higher, though double-digit growth seems very unlikely.