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UK Property Outlook 2018

In 2017, low mortgage rates and healthy employment growth continued to support demand for property, whilst supply constraints provided support for house prices. However, this was offset by the looming Brexit and mounting pressure on household incomes, which exerted an increasing drag on confidence as the year progressed.

As we go into 2018 with no indication that a Brexit deal is about to be reached, some uncertainty still plagues the property markets. Nevertheless, investor confidence has returned, as can be seen from the recent price recovery. In this article CSI Prop analyses the current trends and predictions of the property market for the year.

CBRE’s 2018 Market Outlook forecasts continuing economic growth for the UK, despite the uncertainties caused by Brexit. The report states that those uncertainties are likely to peak this year.

Some sectors will weather the uncertainty well, including industrials and the so-called ‘beds’ sectors (build-to-rent, hotels, student accommodation and healthcare). This is because these sectors exhibit non-cyclical characteristics, or serious mismatches of supply and demand, or some form of structural change.

In its annual market housing forecast, the Royal Institution of Chartered Surveyors (RICS) said that house price growth in the UK would slow with the number of transactions falling slightly, driven by political and economic uncertainty surrounding Brexit and the lack of available stock.

However, despite these factors weighing on the market, the chronic undersupply of housing is likely to support prices, the organisation said. RICS expects prices to drift higher in some parts of the UK with the strongest gains in Northern Ireland, Scotland, Wales and the northwest of England, which includes cities such as Manchester, Sheffield, Liverpool and Newcastle. But, a slump in asking prices across London and the South East will drag down prices in the rest of the UK so that overall growth remains flat.

The Government recently announced its ambition of building 300,000 homes a year in the Autumn Budget alongside a tranche of policies aimed at increasing the housing supply. However, RICS said that as many of these measures won’t come into effect until the mid-2020s, they will do little to alleviate the immediate housing crisis.

 

Residential property to increase across UK

In 2018, the Office for Budget Responsibility expects a 3.1% increase of house prices across the UK, with prices bolstered by first-time buyers benefiting from the stamp duty cuts. Countrywide, the biggest agency in the UK, thinks prices across the country will go up by 2%. More conservatively, real estate firms Savills and JLL both predict a rise of 1%.

Of the two big lenders that operate well-known price indices, Nationwide said it expected property values to be broadly flat in 2018, with perhaps a marginal gain of around 1%. Halifax allowed itself some wiggle room, predicting UK growth from 0% to 3%.

However, in January 2018, the market has, so far, outperformed expectations. Rightmove stated that the average price of a property coming on to the market has gone up by nearly £2,000 compared with last month.

The Office for National Statistics (ONS) reports that the average house price in the UK as a whole was £226,000, up 5.1% YOY.

Average UK house prices from January 2005 to November 2017 (Souce & credit: ONS).

Russell Quirk, chief executive of online estate agent eMoov, is broadly optimistic about the market in 2018: “UK house prices are up 5% since last December and we predict that they will continue to increase at a similar rate in 2018 as the market has already begun to find its feet again.”

Public confidence in the market has risen beyond initial forecasts, and we think that the outlook for the market, as a whole, is positive.

 

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London property charts weak growth

Homes in the capital sold for an average of £482,000, an increase of 2.4% (£11,000) in 2017, according to the latest figures from Land Registry and ONS.

London’s house prices remain the highest in the country but the capital continues to experience the weakest price growth as buyers continue to be held back by affordability constraints.

Richard Snook, senior economist at PwC commented: “Continuing the recent regional trend, London is the weakest performer. House prices have now declined for four consecutive months, from the high of £490,000 in July to £482,000 in November.

“But due to growth earlier in the year, prices are still 2.3% higher than 12 months ago,” he said.

 

Regional markets

The strong 5% (£11,300) increase in house prices was thanks, in part, to strong annual growth in the regional markets.

This increase was led by the West Midlands region, where the average sold price was £192,000, which is 7.2% higher than a year before.

Manchester had one of the highest price growths, up 12.7% with an average sale price of £175,312, whilst Liverpool gained 10.8% (£131,707). Sheffield was up 8.1% (£160,974) with Birmingham at 7.8% (£177,728). London was a drag on overall growth, with the central city having a drop of 10.9% (£729,134).

Annual Price Change by local authority, year to Nov 2017

The figures also showed rises in lending to home movers and remortgaging, despite the Bank of England’s decision to raise the base rate to 0.5% last November.

“The data shows housing market activity remains buoyant, despite November’s rise in the base rate,” said Paul Smee, Head of Mortgages at UK Finance.

“Steady increases in lending for house purchases together with increases in homeowner remortgages reflect a keenness among consumers to benefit from still historically low interest rates, and a highly competitive marketplace,” he said.

Meanwhile, the B16 postcode — Ladywood, in Birmingham, named last year as having the highest levels of child poverty in the UK — has seen the sharpest rise in property prices, according to Barclays Mortgages. They rose by 17% in 2017, as buyers snapped up cheap homes. The Office for National Statistics says Brum lured 6,510 Londoners last year, with 5,280 going back to the capital, thanks to employers such as HSBC and HS2 expanding in the city.

Hometrack says that in Glasgow, Liverpool and Newcastle, the current house-price-to-earnings ratio is lower than the 15-year average, which makes them good value ahead of likely increases in the longer term.

Savills identifies Birmingham, Manchester and the overall Northwest as the top places for buy-to-let investors, with the highest  comparative returns. Image credit: propertyreporter.co.uk

Rental yields

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The buy-to-let market has faced tougher taxes and mortgage affordability criteria over the last year. The introduction of the stamp duty surcharge on additional property, changes to tax relief and tighter lending criteria have cut into landlords’ pockets.

According to UK Finance, the number of buy-to-let mortgages granted for purchasing a property was 75,300 in the year to the end of August 2017 – 47% lower than in the year to March 2016. The growth in the number of outstanding buy-to-let mortgages is lower still, at just 24,800, and there is evidence that some investors are shedding stock.

However, irrespective of the support provided by the Bank of Mum and Dad and Help to Buy, little has changed for the deposit-constrained first-time buyer and the demand for rental stock will continue to grow.

Savills identifies Birmingham, Manchester and the overall Northwest as the top places for buy-to-let investors, with the highest comparative returns. They predict a 4.5% average annual return for Birmingham and Manchester, and 4.1% for the Northwest.

Nett rental yields in 2017 once mortgage costs are taken into account (Source: Private Finance)

Comparatively, mortgage brokers Private Finance place Liverpool at the top for nett rental yields in 2017 once mortgage costs are taken into account, at a whopping 8%. Manchester here is in fourth place at 4.3%.

With lower supply, and increasing demand as house prices continue to be out of reach for the majority of first-time buyers, the buy-to-let market remains lucrative for investors.

We see the property market as a whole on recovery from Brexit in 2018, and investors can get the best returns from investments in the regional markets.

Article by Ian Choong

CSI Prop proudly promotes international investment property with high yields at low risk. Our portfolio comprises residential and commercial property including student accommodation and carehomes, in cities across the United Kingdom (London, Luton, Manchester, Liverpool, Newcastle, York, Glasgow, Scotland; Sheffield, etc) and Australia (Melbourne, Perth, Brisbane). Our projects are concentrated in high-growth areas with great educational, infrastructural and job growth potentials. We aspire to make a difference in the lives of our clients by helping them achieve their investment goals through strong market research backed by third party experts and due diligence. 

Disclaimer: CSI Prop does not provide tax & legal advice and accepts no liability. Readers are encouraged to consult a qualified tax or legal advisor for a thorough review.

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