While the long-term effects of Stamp Duty changes and Brexit on the housing market are impossible to predict, there are some things we know for certain. Transaction volumes across London are now more than half of what they were before the 2008 crash, and 48% lower than what they were this time last year - and the London property market is clearly beginning to react to this.
So will property prices fall in 2017? Mark Lawrinson, Portico’s Regional Sales Director, looks at the data in a little more detail…
The property market timeline
Let’s kick things off by going through a timeline of events in the housing market, shown in the graph below. The pink line shows London property prices and the blue line at the bottom shows England and Wales property prices.
1996 was effectively the start of the London property boom, and for the next 10 years we saw prices in both London and England and Wales increase steadily. In 2007 we experienced the credit crunch and shortly afterwards in 2008 we entered the Great Recession - and it was at this point when we started seeing prices decline. London proved it was significantly more resilient then the rest of the country however, and prices started to turn after 18 months to 2 years. England and Wales struggled for a bit longer, and it wasn’t until 2014 when prices started to rise once again.
Since then, the market has experienced a few more knocks: in 2014 Stamp Duty rates were changed, last year the additional 3% Stamp Duty tax was brought in for all investors and second-home buyers, and more recently, the Brexit vote.
Today, property prices in London are a huge 63% higher than they were pre-crash crisis. To put this into context, prices in London last year were 43% above pre-crash crisis, so we’ve seen a whopping 20% growth in the last 12 months alone.
Are we heading for another housing crisis?
We’ve revisited the previous house crisis in this next graph. The data here focusses specifically on the City of Westminster; the pink line is sales volume, and the blue line is average volume.
You can see quite clearly from the graph that there was a sharp drop in volume around 6 months before we saw any change in price. In fact, volume halved before we saw prices start to fall in the capital.
Interestingly, volume recovery also started 3 months before prices started to rise again. If we think about this in context to the previous slide, then prices have not yet dropped and are, in fact, still increasing. What we do know however, is that volume has a direct correlation on price.
When we looked at the market data this time last year, we saw that central London had experienced a dramatic 50% decrease in volume since the last crash. As our previous graph revealed, this was the tipping point where we saw prices start to drop in the last crisis. So are we on the verge of a house price crash?
84 transactions in Westminster in April
This next graph does a good job of answering the question. The section that’s shaded pink is where we have the data up until last year for prime central London, the blue line shows sales volume and the pink line shows average price.
Fast-forward to March and you can see a huge spike in volume as investors and second-home buyers rushed to buy properties before the Stamp Duty changes came into effect in April. But as quickly as volumes went up, they came down again.
In Westminster in April this year, we saw volumes drop to below 100 transactions in a month to a record low of 84. Transaction volume levels have remained critically low since April, down 60% in prime central London vs last year. With price historically following volume decline, we have now seen the first monthly year on year price decrease of 1.1% in the City of Westminster (September ‘15 to September ’16) since the Recession.
The central London property market is clearly beginning to react to the drop of volumes.
What does Portico predict?
If this chronic lack of volume continues over next 6 months, we could be looking at 6-7% price decreases in prime central London which is likely to filter out to greater London.
Not all doom and gloom for landlords
But it’s not all bad news for landlords or investors. If volumes are dropping, they’re dropping across the board, meaning there’s not just a lack of properties suitable for first time buyers, but also for second steppers etc. And if less people are buying, it’s likely there will be a drop in supply of rental properties coming to the market.
The population is growing, the job market is buoyant, and people are still coming to live in London - so while supply is decreasing, demand is continuing to grow. It’s this imbalance between supply and demand that is likely to increase rental prices, while weaker transaction prices will push up rental yields.
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