There is no doubt that the residential property market is going through a period of adjustment which is impacting on the volume of transactions and seeing house prices, in the main, stabilise or fall slightly.
Figures from the Land Registry show a drop in volume in the early months of 2016 over the same period of 2015 and 2014 of around 20% over the two year period. Land Registry figures are around three months behind the market and I anticipate that the next quarter will show a further reduction.
In my opinion there are three key reasons behind the reduced activity in the market.
(1) Affordability and lack of urgency
(2) Brexit
(3) Regular change and often short term Government policies
Affordability is a key factor in that house prices have risen in recent years ahead of the rate of inflation and ahead of wages. The size of deposit needed, particularly as lenders have been forced to better ensure the ability of people to pay, has grown and recent figures show that the “Bank of Mum and Dad” is now supplying so much of the funding required in house purchases that they would now collectively qualify as a “Top Ten Lender”!!
Demand continues to outstrip supply overall and this is helping keep prices high when there perhaps should really have been a downward adjustment to match the ability of people to pay.
Low interest rates look set to continue for the foreseeable future irrespective of whether we are in or out of Europe which helps affordability but also removes any urgency from the market in terms of “buy now before things get more expensive” etc.
The European referendum debate – Brexit – is certainly creating uncertainty with both sides doing little more than apply scaremongering tactics to try and substantiate their arguments as to whether we should stay or go.
I don’t believe that anyone can honestly know the right answer as the issues are many and complex although the main focus from the Stay campaign seems to be on the economy and on immigration from the Leave campaign.
There is a large element of heart and head involved in making a decision with people understandably feeling that they want to be in control of their own destiny but genuine concern over our economic future if we cut our ties.
For myself, I feel that if we were to leave Europe it is likely that contagion would ultimately see other nations follow suit and long term we would find appropriate trade routes etc. However I have serious economic concerns in the short term particularly in areas such as financial services which could leave London and the UK for Frankfurt or elsewhere with huge financial impact.
I am also concerned that the uncertainty we are currently experiencing across all markets will simply continue for an unknown period whilst the ramifications of leaving and a new order of things gets resolved.
Overall I am in favour of staying and maintaining the economic status quo. That is not to say that everything in the European Union is OK but I would rather be inside the tent p*ssing out rather than outside p*ssing in!
I obviously share concerns over allowing weaker economic nations or those with regimes that we would not ideally identify ourselves with such as Turkey into the Union with free movement of people but believe that this view is shared by many EU countries and a collective solution will be found.
Of course, June 23rd will see the country decide!
Change and Government policies – successive Governments have regularly interfered in the workings of the market in an attempt to try and curry political favour and avoid “boom and bust” scenarios.
No longer responsible for the setting of interest rates they still manage to introduce short term policies that affect the market. The original Help 2 Buy scheme has proved a boon to new homes developers but has seen the majority of new homes stock snapped up by buy to let investors in recent years.
The second-hand Help 2 Buy scheme is due to end this December. I have heard nothing about what will happen when or if it does but a change will certainly distort the market (again).
Recent increases in stamp duty on second homes simply brought forward investment purchases – the longer term impact remains to be seen. This was a crude lever to try and level the market and make it fairer for first time buyers. However, the fact that buy to let investors can still claim tax relief on mortgages (albeit to be reduced over the next four years) and owner occupier purchasers can’t is an unnecessary distortion.
Of course, no Government wants to see house prices collapse. Everyone who owns a home feels better when chatting over the dinner table or down the pub if their property value has risen. A degree of adjustment in prices is however probably needed but will it be allowed to happen?
I am a free marketer and generally take the view that, left to its own devices, the market would find its own level. Forty years in the industry gives me no confidence that this will ever actually be allowed to happen.
For those operating in the property sector, changes in market conditions force change in the way in which they operate. Innovation often springs out of adversity and the fittest survive whilst the weakest fail.
Certainly the days of agents over valuing and complacently waiting for the phone to ring are over. Identifying motivated sellers and buyers is key and, having understood their needs, delivering a proactive, high level of service and salesmanship, vital.
The lettings market is showing some similarities with affordability becoming an increasing issue. The huge amounts of money locked up in tenant deposit schemes (over £3.2bn) could be better utilised to boost the economy and is currently reducing mobility and choice amongst tenants who find it difficult to move when funds are tied up awaiting release from an existing tenancy.
I am currently working with Ajay Jagota and a business called D-Lighted (www.dlighted.co.uk ) to launch a new deposit replacement product that we believe will both protect landlords and tenants but remove the need to tie large sums of money up in deposit schemes. Meetings with Government, RICS, NAEA and ARLA have been positive and we will be launching shortly. The product will shortly be available to all professional letting agents. First mover advantage in the market is likely to prove to be a real winner for those who take the lead.
Conclusions
2016 is likely to prove a much tougher market for agents than recent years and may well see “blood on the carpet” for those who fail to recognise change and take action to change their approach.
The four D’s of Discretion, Divorce, Death and Debt are key drivers of market activity. Divorce and Death generally defy economic conditions and uncertainty. Debt is generally being managed at the moment due to low interest rates but people are now exercising their Discretion and choosing to postpone or forgo moving.
There is never any room for complacency in business but it does creep in and agents who think that simply placing a property on Rightmove and waiting for the phone to ring is a successful formula are going to suffer. Negotiators who have had a relatively straightforward existence over the last seven years are going to need to identify motivated clients and customers and make sure they do everything possible to do business with them.
A challenging period ahead looks certain.
Michael Day MBA FRICS FNAEA
Managing Director