Is it possible the Goliath has fallen? Is the United Kingdom on the verge of seeing its vaunted property market fall out of favour? While there is certainly no talk of a collapse, all the news coming from London over the past few weeks has been cautious if not downright scolding. At the end of April the new Mortgage Market Review (MMR) was implemented, a programme that demands all lenders guarantee borrowers can afford their mortgage — similar to Singapore’s market-dampening TDSR. Mortgage approvals promptly dropped by 12 percent according to the Bank of England, though approvals are up over a year ago. In May BoE governor Mark Carney declared the country’s residential property market the biggest threat to its financial stability and recovery. And then in June, the European Commission publicly spanked the UK, recommending more housing construction, raising taxes on high value property, aiding first time buyers and preventing a bubble. That’s a lot of negativity for the world’s favourite real estate market.
The Big Picture
In early June the UK’s largest homebuilder, Nationwide, interpreted the May price rise of 0.7 percent as a sign the market could be moderating. Immediately following the EC’s criticisms, Nationwide’s chief economist, Robert Gardner, told the BBC that there were signs the housing market may be starting to moderate, tentative ones and not indicative of a broad cooling trend. Average home prices are at their highest since 1991, and that, the spring slowdown and the role of the MMR are the only news that counts right now.
But first time buyers are finally becoming major players. Nationwide said first timers accounted for 48 percent of transactions in March — and the government’s Help to Buy programme had little to do with it. Despite regular growth across the country, HtB loans have been concentrated in locations where prices are below the national average. Not much has changed in London. However, the EC’s comments that would lead to a bubble were unwelcome, particularly by London mayor Boris Johnson, who cited the negative effect a tax on high value properties would have on residents in appreciating assets. “The [EC] should butt out,” he told the Evening Standard.
This could simply be a case of the market correcting itself, and that London is simply taking a breather after years of unsustainable growth. Nonetheless, Savills predicts that over the course of the next five years, values in the UK will rise by a whopping 25 percent in the mass markets, as high as almost 32 percent in the South East as whole and just over 24 percent in London. Nick Gregori, residential analyst at Savills Research expected a slowdown in domestic demand eventually. However, “It is too early to say whether MMR has had any effect on price or transaction levels, but it is important to remember that around a third of transactions are currently accounted for by cash buyers. Any tightening of lending criteria or expectation of a base rate increase will therefore have no effect on a significant part of the market. Another 1 in 12 are buy-to-let investors, who won’t be subject to the new mortgage rules either,” notes Gregori.
The Wide World
So what does all this mean for investors? The UK and London are the world’s runaway favourite investment destinations, with London ahead of locations like Monaco, Gstaad, Paris and Saint-Jean-Cap-Ferrat for elite European addresses according to Engel & Völkers.
The only real risk investors may have to consider is BoE chief Carney’s warnings about a structurally troubled and perpetually undersupplied housing market being detriment to the UK’s financial and economic recovery and stability. Prime Minister David Cameron agrees with him. Carney sees an increase in large-value mortgages and the inevitable debt overhang as economic destabilisers and, of course, a dangerous supply shortfall, despite a 31 percent increase in housing starts to March.
Ironically that shortfall has been one of the keys to London’s appeal as an investment location and the reason the city has outperformed other parts of the UK for so long. But can it go on? With London prices rising more than twice the UK average in the last few years, Savills’ second quarter residential report stated London is, in theory, losing its capacity for price growth over other markets in the medium term and will slow down. The disparity within the city also muddles the picture. Equity-rich (investor) Kensington is sitting at 134 percent its 2005 levels, while mortgage-reliant (end-user) Barking is up just 10 percent. But with supply so woefully short, London’s position is unlikely to change in the future. “Price pressures have been building, and affordability is a big issue in London. The controversial issue is whether foreign demand simply acts to push prices higher, or whether demand from foreign buyers helps developers de-risk developments and deliver more units into the market,” says Liam Bailey, head of residential research for Knight Frank. “In reality purchasers looking to buy to hold property empty in London are a small minority — most overseas buyers want an income from rental and therefore their purchase helps the rental sector to grow.”
Ultimately, investors have little reason to panic. Bailey reminds that while political solutions are impossible to predict, any significant intervention could do more damage. “It would however be a significant change for the UK to actively seek to disadvantage non-UK buyers,” he says. “The UK’s tradition is as an open trading nation and a reversal of this position would be unusual.”
There may be room for investment outside of London if any of the big-ticket projects being talked about come to pass. “In the other second- and third-tier cities in the UK there are good yields on offer, maybe not so much in capital growth,” argues Blackfish Director Robert Pearce. Birmingham and Manchester are strong options, with Manchester pulling out in front due to rumours of a new Chinese-funded airport. “It will make Manchester more of a business hub for Europe and internationally and it will take some of the strain off Heathrow. If that goes ahead, that could dramatically change the landscape in Manchester,” he says.
Not much is likely to throw the UK off its perch, with the only real threats to its dominance being the sterling appreciating and politics. “I believe that the greatest potential threat to the UK prime residential property market is political change. A change in government could lead to a change in housing policy and possibly further changes to taxation policy affecting certain types of international investors,” theorises Walter Boettcher, director of research, EMEA with Colliers International, adding that the EC comments won’t hold much water either, given, “The large-scale renegotiation of UK-EU relations that are brewing.” Pearce agrees. “As we come to an election year will the government want any interventionary measures that are seen as potentially vote-losing? I don’t think you’ll see any big moves until after the general election.”