Market Update - December 2016

As we move ever closer to Christmas and the New Year it is time to reflect on 2016 and to look forward to the year ahead.

2016 has been a year of change for the property market and notable for a few key Government interventions, particularly in respect of the private rental sector.

An additional 3% stamp duty payable on second home and investment property purchases was introduced in April and has slowed the number of buy to let investors entering the market. This move was designed to encourage a more level playing field to allow greater number of first time buyers to buy homes and there is some evidence that first time purchase numbers are up although overall sales transaction volumes have been static or falling, particularly in London and the South East.

Reductions in tax relief on wear and tear and, in coming years, on mortgage payments have also targeted landlords.

An announcement in the Chancellor’s autumn statement on 23rd November said that upfront fees to tenants would be banned at some future date (probably not before 2018) and is also likely to see costs to landlords increase. This announcement was unexpected and unhelpful in that it proclaimed the outcome before any consultation had taken place. The exact detail is therefore unknown and the announcement currently looks like a bit of political posturing that could get “watered down” or “delayed” in a legislative environment that will have to come to terms with Brexit and its implications.

Moves to remove tenant fees are however likely as they have already taken place in Scotland and Wales and there is a strong political lobby in favour of their demise. Letting agents would be well advised to consider their fee strategies now and see if there are sensible ways of maintaining the income derived from tenant fees (which I estimate to average around 15% of total fee income) whilst gaining first mover advantage in the market by offering a different approach – perhaps by gaining more income from insurance commissions, utility switching and landlord orientated fees. The market has moved more towards a “tenants market” and so attracting quality tenants has become more difficult yet has a high value to both landlords and agents alike.

Boosts for house building and affordable housing were welcome announcements in the autumn statement.

The Government is clearly targeting an increase in owner occupation which has fallen to around 63% of households – down from around 71%. The differential has been largely taken up by the private rental sector which now stands at around 20% of all UK households. The balance in these numbers being social housing.

The Government had previously introduced two schemes under the Help 2 Buy moniker and the second of these, aimed at the second hand market through a mortgage guarantee type scheme will end this month. The scheme aimed at helping the new homes market will continue.

Importantly the Government did announce additional expenditure on infrastructure and this is likely to lead to improved transportation links and greater job creation. Unemployment has fallen considerably in recent years and with interest rates at record lows, affordability for those with enough funds for deposits, has become more attractive.

Of course the big news in 2016 was the vote to leave Europe. No-one is really sure of the impact and repercussions of this decision but, in the short term, we are likely to see inflationary pressures brought about by the devaluation of the pound against major currencies such as the dollar and the euro. This may, in turn, see interest rates have to rise in the coming months albeit from a very low starting point.

Movements in interest rates have much less impact on the property market now than in years past as the majority of mortgage holders are on fixed rate schemes and have hedged their positions accordingly.

The majority of estate agents and those operating in the property industry remain quite conservative (with a small c) and this could prove to be a growing threat in the weeks and months ahead as a number of exciting projects and innovative new products and services start to hit the market.

Many agents are still spending more on their desks and chairs than they do on their online and database marketing strategies. I know which is likely to produce the better return!

If you look at the portals, it is only sixteen years since Rightmove launched as a £10 million “start up” and it is now capitalised at around £3.7bn. But even Rightmove will need to evolve its business model from that of primarily being an online advertising medium if it is to retain its leadership position. Zoopla is taking a different approach to the sector and I can’t see On the Market surviving as anything other than a small niche player.

The growth of the internet and the portals has seen the number of people contacting agents diminish and the stage at which they contact agents become delayed, and yet, agents still, in the main, do little to capture the customer earlier and staff are often “order takers” rather than proactive business generators. Selling and buying, letting and renting is still a people business yet I feel that the quality of communication offered by many is well below what it could be and, if faced with an online execution only service at a fraction of the fee, agents should ask themselves whether they are really doing enough to justify to their clients a significant fee differential if that client cannot differentiate between the services being offered..

So what does this mean for the property market in 2017?

Well, crystal ball time but I do not see a significant change from where we are now.

The simple fact is that demand for housing outstrips supply and this fact alone is likely to ensure that there is no collapse of the market in either volume or price terms although uncertainty around Brexit and affordability are likely to be restraining forces.

Housebuilding, whilst still falling short of required levels is increasing and this is positive news.

Despite the, some would say “attack” on private landlords, there will remain strong demand for rented property both through necessity and choice and, whilst some highly geared landlords may see slightly reduced yields as a reason to exit the market, the majority of the sector is not highly geared and returns are still likely to look OK against other investments (particularly if taking a medium term view and the likelihood of further capital growth).

Many landlords have also seen significant capital growth during their period of ownership. This is likely to remain subdued in the coming months but will not prove damaging. Keeping property occupied is the key to investment success and the majority of landlords take a pragmatic and sensible view on rental levels in order to maintain income.

The sales market may become slightly more affordable for buyers as prices steady and wages rise but affordability is likely to remain a major restraining force on both volume and price increases. External conditions are unlikely to assist the market but are unlikely to prove damaging either and the current status quo is likely to remain.

People need to live somewhere. Improving employment will mean greater mobility is needed and there is still a pent up demand amongst those who are looking to upsize or downsize.

The busiest time of the year for internet activity in the property market is the period between Christmas and New Year and so bringing a property to market at this time can help it stand out from the crowd and get “first mover advantage” over those who wait until the New Year and join a greater number of sellers and landlords placing their properties on view.

To conclude, I expect 2017 to have its challenges but the fundamentals of the market remain known and strong. I do not see anything on the horizon that should specifically defer decisions.

Finally, I would like to take this opportunity to wish you, your family and friends a very Merry Christmas and a Happy, Healthy and Prosperous New Year.

Michael S Day MBA FRICS FNAEA
Managing Director