Trend: London house prices

Is a price correction taking place?


  • Prices are noticeably shifting downwards across the capital as swathes of sellers commit to price reductions in an attempt to attract purchasers in a transparent shift to a buyers’ market. Note, in many cases sellers are open to bigger discounts than those most ostensible in the online portals. However, are these reductions bridging the expectations gap with the buyer market?
  • The recent stamp duty and mortgage interest relief tax changes have cooled the market, particularly in the buy to let and investor segment. The recent general election and failure of the Tories to maintain a majority seating status quo has also created political uncertainty.
  • We cannot also forget the rupturing Brexit referendum decision last year that continues to fuel uncertainty going forward until Britain finally leaves in 2019. Such uncertainty caused by the Brexit divorce decision and ongoing negotiation will be prolonged. A large faction of prospective sellers may decide to see how the political situation unfolds.
  • The main house price data indicators are slow to report the latest changing atmosphere. The latest news talks of slower growth (London growing by 1.2% in the last quarter vs 5% in the previous quarter). However, these delayed and poor stats mask in our view declining prices and the ability to negotiate lower prices, both on and off market.
  • Recently, there have been material corporate profit declines from Foxtons (FOXT) and Countrywide (CWD) blaming an uncertain market (-64% and -98% on 1H pre-tax profits respectively). The big falls in profits are being blamed on a sluggish property market. These real estate agents like many others will now try to befriend prospective buyers in order to entice them after a period of pitting them against each other in crude open house scenarios. (We don’t think the next half is going to fare any better for these companies and also note the introduction of more online prop tech disruptors that will impact the more traditional agents going forward).
  • Though there have been more price declines, they are not declining at a pace that bridge the gap to meet buyers expectations in many cases. Many prospective sellers are holding back from listing their properties due to the subdued environment resulting in more limited stock. In addition, the investor market has been hit but residential owner occupiers are still on the hunt taking advantage of the relatively cheap levels of credit available to them.
  • Nevertheless, the higher transaction costs have somewhat stunted the buy to let or investor market and this increased cost must be accounted for in the overall cost to buy or not to buy. This group of property buyers are key to property prices. In addition, demand is weakening due to a falling number of migrants and proposed exit of financial services personnel post-Brexit. The supply glut of luxury apartments adds to the downward pressure. Therefore, unless there is a monumental shift in government policy to provide further stimulus, we assert that the current price reductions will continue.
  • The overall effect of a prospective price correction poses dangers for many property owners who may consider reducing exposure or switching their capital allocations to different types of property with greater equity buffer levels. Now is not the right time to place too much value in house price inflation in the short term. A smarter strategy is required.
  • On the other hand, we do note that a mix of cheap longer term credit and recent legislative policy changes promoting a ‘generation rent’ provides compelling longer term view on property investment; the latter particularly from a PRS perspective. However, it must be noted that with forecast interest rate increases over the coming year, credit will start to get more expensive. It is certainly worthwhile booking that refinancing in sooner rather than later. In addition, the low interest rate environment has kept the number of distressed sellers low- this may change going forward.

 

  • In the UK’s current economic, political and social climate, buying a property that safeguards and grows your capital is challenging.  A smart property acquisition strategy is required.
  • Contact us at manager@londonpropertyanalyst.co.uk to learn more about how we can assist you in buying London property.

 

Trend: The Housing White Paper


Trend: Housing White Paper – Good things happen to those who wait…?


 

  • housing white paperThe Government’s Housing White Paper was finally published earlier this month. The consultation document that outlines the Government’s thinking on how to repair ‘the broken housing market’. However, the Housing White Paper has faced criticism by many housing experts. They claim the government is dithering rather than freeing the regulatory shackles to promote house building. One can empathise with those who wish for a more expedited process. After all, it is a supply side issue that desperately needs to be solved.

Key Points

  • house building new homes
    House building year-on-year

    There was a clear move away from previous pledges that focused solely on driving home ownership levels upwards. Housing of all tenures has a part to play with support for large-scale institutional investment in the Private Rented Sector (PRS). The UK enjoyed a house price inflationary environment for the past few years. A build-to-sell approach is now expected to be outweighed by a build-to-rent approach for many developers. Getting a strong operating partner is key to tapping into greater institutional PRS appetite.

  • The government had indicated several years ago that it was targeting 200,000 homes to be built per annum. The White Paper has now increased this target stating ‘225,000 to 275,000 or more homes per year are needed to keep up with population growth and start to tackle years of under-supply.’ Such targets need be combined with reductions in red tape around brownfield and greenfield sites. Did this occur?

    Other Points

  • Status quo was maintained with regards to the Greenbelt. Some anticipated increased scope for brownfield site use within the Greenbelt, particularly adjacent to existing communities or transport infrastructure.
  • There was no mention of stamp duty, which has increased for all home buyers over the last two decades and reflected in stamp duty receipts. HMRC reported that it had received nearly £2.4 billion in 4Q 2016. The 2016 policy imposing greater stamp duty via a 3% surcharge on 2nd+ home buyers has already had a marked effect on the housing market, particularly the higher priced homes brackets. Another key question has arisen as to whether buyers should pay or if sellers should now assume the stamp duty burden?
  • Finally, there was a U-turn on Starter Homes – the affordable housing scheme proposed by David Cameron in 2014. They will still go ahead as part of a wider measure to boost all forms of Affordable Housing.

Summary

No doubt, it is an ambitious, daunting and urgent project to correct the current severe and growing supply and demand imbalance. It is a much-needed focus given the challenges faced by many prospective home-buyers that have inherited strong home ownership ideals. They have been simply out priced. However, time will tell whether the suggestions provided are the answers to fix the supply-side in the overwhelming supply and demand imbalance. Taking too much time may not be the answer and politically-driven digs at key players, such as buy-to-let investors and developers, within the property sector is counter-productive. Working with both established and new entrant developers and property investors should be the focus to help boost housing supply.

Trend: BTL Underwriting – Changing Rules


Buy To Let Underwriting – Changing the rules of the game. What are the strategic considerations?


Why the changes?

  • Over 2015-16, the Prudential Regulation Authority (PRA) undertook an underwriting standards review of 31 BTL lenders constituting 92% of hte .
  • Concerns were raised around the relaxation of underwriting standards to fuel lender growth may result in borrowers more vulnerable to negative economic changes.
  • Following a consultation process, PRA changes were proposed to ensure that lenders adopt a more “prudent” line in lending, “prevent a marked loosening in buy-to-let underwriting standards”, and “curtail inappropriate lending and the potential for excessive credit losses”.

What does this mean?

  • Tighter assessments on the affordability of BTL mortgage applications to impose a greater buffer for the investor if interest rates were to rise, or during void periods, so that repayments would not become unaffordable.
  • Broadly, the stress test is increasing to 5.5% (from 5%) and Interest Coverage Ratio (ICR) is increasing to 145% (from 125%) plus a number of additional requirements as part of applications.

When are these changes happening?

By 1st Jan 2017, all lenders affected should have implemented the required interest coverage ratios to include the impact of personal tax changes and interest rate affordability stress tests.

What are the exemptions?

  • Bridging loans, holiday lets, property investment lending, corporate lending BUT these deals will be monitored by the PRA to ensure a prudent approach to underwriting.
  • Consent-to-let deals, BTL with rems less than 12 months, BTL mortgages where the existing borrower does not wish to make additional borrowing beyond the existing outstanding debt (excluding fees & administration costs for arranging the new mortgage product).
  • 5-year products – where lenders are offering a 5 year rate (or more) fixed rate product, no need to increase the affordability stress test.

Do you have 4+ mortgaged BTL properties?

  • PRA research highlighted that arrears rates increased as portfolio sizes increased. The overarching aim is to reduce arrears, thus the PRA has asked lenders to take a specialist approach when underwriting deals for portfolio landlords.
  • You will be most likely need to go through a more specialist underwriting process that will require greater personal information than has been previously requested.
    • Your experience of the BTL and your understanding of buy-to-let finance
    • Your assets and liabilities (including tax)
    • The merits of lending on new properties based on your portfolio and business plan
    • The historical and future expected cash flows related to your portfolio

What is the overall net impact?

  • By 1st Jan 2017, upper borrowing limits are likely to be reduced with a significant proportion of BTL lenders, especially for those looking to raise capital.

Financial example for a specific property:

BTL Underwriting - Changing Rules

  • Max debt has reduced by £56.7k ; max LTV has reduced from 75% to 59%
  • To maintain same LTV level as before the proposed changes, the rent has to be 28% higher

On a portfolio basis, if you own 4+ properties, we would expect the same adjustments to apply when calculating figures like shown above on an aggregated basis – BUT also taking into account the exemptions noted earlier.

 

London Property Analyst is not a qualified tax advisor and the above does not purport to be and should not be relied upon as tax advice.