RESIDENTIAL MARKET COMMENTARY

Transcription

1 A Cushman & Wakefield Insight Publication RESIDENTIAL MARKET COMMENTARY October 2017

2 Economic Overview ECONOMIC OVERVIEW The chancellor of the exchequer s Autumn statement supplied us with a rather gloomy set of revised-down OBR forecasts for GDP over the coming few years. As shown in the below graph, since the Spring budget, growth forecasts have been significantly revised-down by an average of half of one percent for the coming four years with growth not exceeding 1.5% until ECONOMIC INDICATORS* GDP growth (%) Consumer spending (by product/service - %) CPI Inflation (%) Exchange Rate (US$ per ) Exchange Rate (Euro per ) BoE Interest rate (%) Figure 1 - GDP Forecasts 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Spring budget 2017 Autumn budget 2017 With CPI inflation continuing to skirt along the 3.0% threshold above which Mark Carney would be obliged to write a letter of explanation to the Chancellor, the Monetary Policy Committee (MPC) voted in favour of a 25bps rate rise to the BoE s base rate at November s meeting. Opinion on when the next rate rise will take place ranges widely, but a general consensus is there will be no urgent need to shift to 0.75% until 2020 at the earliest. Record low unemployment rates continue to refuse to feed through into notable wage growth, with year-on-year wage growth running at around 2.0%. With CPI not expected to dip below 2.0% until 2019 and the prospects of a significant uptick in wages slim, the damaging scenario of price inflation above wage growth does not look set to disappear any time soon. Current rates of CPI inflation have now exceeded wage growth for almost a calendar year. Figure 2 - CPI Inflation & Average Earnings (y-on-y % change) 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% May 16 Jun 16 Jul 16 Aug 16 Sep 16 Oct 16 Nov 16 Dec 16 Jan 17 Feb 17 Mar 17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Average Earnings (exc bonuses) CPI Inflation Source: ONS / Oxford Economics / OBR 1

3 National Market OVERVIEW The English housing market continues to cool as we head towards that end of the year. In terms of annual rates of house price inflation, the spread between fastest and slowest growing markets of just 4.8 percentage points highlights a huge levelling-out of demand levels across England (see figure 3). Just three years ago, this spread was a huge 17.6 percentage points, with annual rates of house price inflation running at 18.6% in London and 0.9% in the North East. This was also the last time London held top spot in the house price inflation league table, highlighting how rapidly heat has been lost from London markets. As also indicated in figure 3, 12 month house price inflation to Sept 17 has altered significantly from the preceding 12 months (to Sep 16). Whereas London and the East of England are experiencing considerable cooling, all other regions, excluding the South East are currently experiencing higher rates of annual house price growth than 12 months ago. 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% North West South West Figure 3 - House Price Inflation Now & Then East Midlands East West Midlands Yorks & Humber South East 12 Months to Sept Months to Sept 16 North East London 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% Even when breaking down into smaller areas, the fractured and wildly differing fortunes of the English housing market are evident. As shown in the adjacent map, areas currently experiencing falling prices (coloured in BLUE) are often in close proximity to areas currently experiencing double digit growth (coloured in RED), and in some cases are actually neighbouring each other. This is most evident in the area directly to the North of Manchester where annual rates of house price inflation in neighbouring local authorities currently range from +14.0% to -0.6%. Figure 4 - Average House Prices (Major Indices) 230, , , , , , ,000 UK HPI Nationwide Halifax Sources: UK HPI / Nationwide / Halifax 2

4 National Market (cont) TRANSACTIONS Although projected transaction volumes in Q are increasing, levels remain historical low and are not showing as much of a Q-on-Q increase as we would expect for this time of the year, as historically transactions in the third quarter of any year are higher than other periods due to the seasonal nature of the housing market. As indicated in the below graph, the outlier to this trend is London, where transactional levels have fallen Q-on-Q since Q The London second hand market is now so stagnated that it s sluggishness even transcends seasonal trends. 50,000 Figure 5 - Transactions 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Q1, 2014 Q2, 2014 Q3, 2014 Q4, 2014 Q1, 2015 Q2, 2015 Q3, 2015 Q4, 2015 Q1, 2016 Q2, 2016 Q3, 2016 Q4, 2016 Q1, 2017 Q2, 2017 Q3, 2017 (p) East Midlands East of England London North East North West South East South West West Midlands Region Yorkshire and The Humber NEW HOME CONSTRUCTION Latest data from DCLG showed a welcome uptick in new home completions in England, with over 41,000 homes completed during the second quarter (Q2) of the year. This represents a 8.2% increase on the preceding quarter and the highest amount of new homes built since the 2007/2008 market downturn. Coincidentally, this same 8% Q-on-Q growth rate would be required if the government were to achieve their aim of building 300,000 new homes per annum by It does however look as though the latter part of this year s data may not follow this trend, with new home construction starts for Q2 falling back 5.7% (from Q1 figures). This fall in construction starts was mostly due to a significant lack of activity from housing associations (HA s). Figures for HA starts were the lowest in 2½ years, whereas private enterprises started construction on the 2 nd highest quarterly amount of houses since the 2007/2008 downturn. 60,000 Figure 6 - New Home Starts (England) 50,000 40,000 30,000 20,000 10,000 0 Private Enterprise Housing Associations Local Authorities Sources: UK HPI / Department for Communities and Local Government 3

5 Prime London Markets PRIME CENTRAL LONDON (PCL) After flat-lining through the latter part of Summer and Autumn, capital values in Prime Central London took a bit of a downturn in October, recording minor falls of -0.2%. However, average discounts to asking prices remained stable, suggesting steep falls are not on the horizon in the near future. Average achieved per square foot values now stand at 2.2% lower than a year previously. Transactions once again fell significantly month-onmonth, highlighting the stagnant nature of the PCL second hand market. Indicator Sales Transactions M-on-M (Sep-Oct) Y-on-Y (Oct-Oct) -23% -17% Capital Values -0.18% -2.17% Average sale discount % -1bps (5.91%) +93bps Rental Prices +0.61% -2.44% In the rental market, prices took a strong upward turn with gains of 0.6% recorded. Average discounts held relatively firm, indicating that we should head into 2018 with prices holding firm. Average rent discount % +9bps (3.23%) -16bps OUTER PRIME LONDON (OPL) Mirroring the performance of Prime Central London, capital values in outer prime markets took a bit of a downward turn during October, recording falls of -0.3% and now sit -2.6% down in relation to October 2016 levels. Indicator Sales Transactions M-on-M (Sep-Oct) Y-on-Y (Oct-Oct) -10% -2% Capital Values -0.26% -2.63% Although transactions in outer prime areas fell significantly in October, it was not to the same degree as those recorded as in PCL markets. Average sale discount % +5bps (4.84%) +69bps As with Prime Central London, rental values witnessed an upward movement for the first time in a year, and now lie just 1.9% down year-on-year. In more positive news for the rental market, the average discount-to-asking price is beginning to shrink considerably, indicating a strengthening market. Rental Prices +0.32% -1.85% Average rent discount % -22bps (2.64%) -73bps Figure 7 - Cushman & Wakefield Prime London Markets Index (Oct 2016 = ) Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 PCL Cap Values PCL Rents OPL Cap Values OPL Rents Source: Cushman & Wakefield Research / LonRes Area definitions for report: PCL = W1H, W1U, W1G, W1B, W1S, W1C, W1K, W1J, SW1A, SW1Y, SW1P, SW1H, SW1E, SW1W, SW1X, SW7, SW3, W8. OPL = NW3, NW8, W2, W9, W11, W14, SW6, SW10. 4

6 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Mortgage Market OVERVIEW Figure 8 Higher Risk Lending Gross mortgage lending for September increased 5% from September 2016 to 21.4bn, boosted by growing first time buyer activity. In light of November s budget exempting stamp duty for first time purchases up to 300,000 (& a reduction from 300, ,000), we expect this trend to continue. While the exemption itself will do little to impact the significant affordability barriers faced by first time buyers, it will no doubt improve sentiment within this buyer genre and will release any latent demand being held back by previous concerns over a cooling market. 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% LTV 90%+ (LHS) Interest only mortgages (RHS) 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% The Bank of England s widely expected decision to raise interest rates shocked few, and while the accompanying mortgage rate increases will no doubt lead to concerns of an increase in the number of forced-sellers and a subsequent housing market downturn, we would expect its impact to be limited due to the post 07/08 lending market landscape, differing considerably from the pre-2007 mortgage market. As highlighted in the above graph, from 2008, lenders have completely altered their approach to higher-risk lending, with the percentage of new mortgages issued with Loan-To-Value (LTV) ratios of 90% and over falling from over 16% precrash, to 5% at present. The same trend is true when looking at interest only mortgages. In the period leading up to the market downturn, over half of new mortgages were interest only, but this figure has now fallen to just 19%. This rate rise does however increase the affordability issues currently facing vast number of first time buyers and potential home-mover. As indicated in the below graph, income to house price ratios in four English regions are now above 2007 levels. Wage and house price forecasts suggest this affordability issue will become further exaggerated in three of these regions (London, the South East & East) in the coming years (shown by the red bar). Figure 9 - Average Earnings-to-House Price Ratios Above 2007 peak Below 2007 peak London South East East East Midlands South West West Midlands Yorks & Humber North West North East Sources: UK HPI / UK Finance / CML / ONS 5

7 Author Lee Layton Associate Director Residential - Research lee.layton@cushwake.com Contacts Candice Matthews International Head of Residential candice.matthews@cushwake.com Jonathan Stickells Valuation & Advisory Jonathan.stickells@cushwake.com Mike Bickerton Residential New Homes mike.bickerton@cushwake.com Nick Jacks Valuation & Advisory nick.jacks@cushwake.com Jack Simmons Residential - Investment jack.simmons@cushwake.com Jonathan Godfrey Valuation & Advisory jonathan.godfrey@cushwake.com Fergus Jack Residential - Investment fergus.jack@cushwake.com Andrew Palmer Residential - Land andrew.palmer@cushwake.com Neil Batty Residential Head of International neil.batty@cushwake.com Daniel McDonagh Residential - Land daniel.mcdonagh@cushwake.com 6

8 About Cushman & Wakefield Cushman & Wakefield is a leading global real estate services firm that helps clients transform the way people work, shop, and live. The firm s 43,000 employees in more than 60 countries provide deep local and global insights that create significant value for occupiers and investors around the world. Cushman & Wakefield is among the largest commercial real estate services firms with revenue of $5 billion across core services of agency leasing, asset services, capital markets, facility services (C&W Services), global occupier services, investment & asset management (DTZ Investors), project & development services, tenant representation, and valuation & advisory. To learn more, visit or on Twitter. Disclaimer This report should not be relied upon as a basis for entering into transactions without seeking specific, qualified, professional advice. Whilst facts have been rigorously checked, Cushman & Wakefield can take no responsibility for any damage or loss suffered as a result of any inadvertent inaccuracy within this report. Information contained herein should not, in whole or part, be published, reproduced or referred to without prior approval. Any such reproduction should be credited to Cushman & Wakefield. Cushman & Wakefield April 2017 UK Headquarters 125 Old Broad Street London, EC2N 2BQ Phone: To see a full list of all our publications please go to