London Residential Property Market Report Winter 2017/18
Sales Market: Key Trends
• Affordability issues slowed sales in Greater London in 2017
• Price reductions and an increase in availability prompted rise in high end sales
• Prime capital values fell over the year but rate of decline slowed in Q4
• Growth in new homes’ sales in 2017 but unsold stock also rose
Supply and Demand
The lingering impact of punitive stamp duty rates for high value property, the phasing out of tax relief on finance costs for buy-to-let landlords and the uncertainty surrounding Brexit caused both buyers and sellers to hesitate for much of 2017 which slowed activity.
Data for the first 10 months of 2017 suggest that transaction numbers across Greater London were around 13% down on the 2016 figure, although this figure was distorted by the highest ever number of sales in March as buyers sought to beat the introduction of the stamp duty surcharge on second properties. A more comparable analysis would suggest around a 5% drop.
However, in the prime market there was a noticeable change in attitude on the part of both buyers and sellers as the year progressed. Vendors increasingly realised that realistic pricing was key in securing a deal especially as available stock rose in the final months of the year. Consequently, new instructions and exchanges were both over 12% higher in 2017 and available stock at the end of the year was 15% up on the corresponding point in 2016.
Many buyers decided that they were not prepared to wait any longer and felt more confident that asking prices represented better value. LonRes reports that 46% of properties on the market between October and December had had a price reduction and of properties sold, the average discount on initial asking price was 8.7%.
Average house price growth slowed to 2.5% in 2017 across Greater London according to the Land Registry, down from 5% in the previous year.
Price growth was greatly affected by worsening affordability with Nationwide data showing that a typical 20% deposit for a house in the capital now equates to £80,000, which would require just under 10 years to accumulate.
Greater availability of properties for sale and the higher stamp duty rates kept values under downwards pressure in the prime market. The Chestertons Capital Values Index, which records data from across its 33 branch network, recorded a fall of 1.1% over the final quarter and a 6% drop over 2017 as a whole.
There are signs of stabilisation, however, with many local markets seeing a slower rate of decline and others recording modest growth in the final quarter.
Analysis of sales by price band reveals the continuing impact of the stamp duty rates at the higher end of the market and the related significant number of price reductions in 2017.
The proportion of sales of less than £1m rose to 65% compared to 62% in 2016, while sales between £1.5m and £1.99m fell from 10% to 8.5%.
New Homes Market
The new homes sector performed better than expected in 2017. Sales were 6.5% higher than in 2016 although the number of unsold completed units at year-end also rose to reach 1,470. Sales to large build-to-rent investors accounted for 23% of all sales and this is a sector which looks set to grow further in the coming years.
Construction starts rose by 12.6% and although completions were 7.6% lower, the number of units under construction at the end of 2017 had risen to 64,700, up 8% on the same point in 2016. However, even allowing for the fact that these statistics only reflect schemes of 20 units and above, the annual completions figure of just over 22,500 was way below the London Mayor’s target of 66,000.
Asking prices for new homes in 2017 rose by 2%, taking the average asking price to £900/sq ft. However, despite the improvement in sales, pricing is still critical in achieving quick sales. 45% of unsold units at the end of the year were priced between £1,000/sq ft and £1,499/sq ft.
We have entered 2018 with more optimism than at the corresponding point last year. Although the economy is forecast to slow, employment remains at or close to record levels and productivity is improving.
Whilst there is the possibility of a further increase in Bank Rate, this would likely only be a further 25 basis point increase and rates would still remain low by historic standards.
Although Brexit uncertainties remain, there is an increasing sense that UK residents at least are beginning to tire of putting their plans on hold because of what may or may not happen. Meanwhile, London remains very much on the radar for overseas buyers.
There are signs that high end prices in some parts of the capital are bottoming out. However, the greater selection of available properties and price conscious buyers means that any growth this year is likely to be modest. Across Greater London, affordability issues are likely to increase as borrowing costs rise. Supply shortages will persist as the London Plan’s ambitious housebuilding targets appear unlikely to be met.
Combined with a likely drop in buying activity from small landlords using debt to finance their property acquisitions, this points to a further drop in transaction numbers in 2018. However, persistent supply shortages are likely to sustain a moderate level of price growth
Lettings Market: Key Trends
• The Prime London lettings market saw increased activity in 2017
• Tenants encouraged by increased availability and falling rents
• Greater London rental growth slowed in 2017 and turned negative towards end of year
• Mortgaged landlords increasingly concerned about reduction of tax relief
Supply and Demand
Although activity in the prime market slowed in the final quarter of the year, which is usual following the traditional peak third quarter, 2017 as a whole represented a marked improvement compared to 2016.
There was greater interest from new tenants attracted by a good choice of available properties and falling rents, resulting in a 9% increase in agreed lettings over the year. The number of available properties was boosted by frustrated sellers but overall availability fell by nearly 12% over the year owing to strong tenant demand.
The number of tenants renewing their contracts followed a similar pattern and were 7% lower than in 2016. The reduction was in part due to tenants enjoying a strong bargaining position but also reflected an increase in the number of tenants moving out of rented accommodation and buying their own home.
Tenant demand outside the prime locations remained strong but remained under sustained affordability pressure. This resulted in a continuation of “alternative” rental solutions, ranging from flat-sharing to returning to the parental home.
Rents & Yields
Average rental values in Greater London rose by 1% in the 12 months to December according to Homelet, taking the average rent to £1,524/pcm.
The Chestertons London Rental Index, which tracks rents at the higher end of the market, recorded a fall of 1.1% in the fourth quarter and a 4.7% drop over 2017 as a whole.
Gross yields were unchanged at 3% at the end of December compared to the end of the previous quarter. Prime central London yields were similarly unchanged at 2.7%, while yields in localised markets ranged from 4.3% in Canary Wharf down to 1.9% in Knightsbridge/Belgravia.
The drop in rental values combined with higher stock levels going into last year triggered an increase in lettings activity in the prime market and we expect that tenant demand will remain strong in 2018.
Supply across Greater London as a whole could well reduce as we anticipate many smaller part-time/accidental landlords with mortgaged properties will be driven out of the sector by the increasing tax burden – from April they will lose half of their tax relief which is likely to make their investments increasingly unviable.
Indeed, a recent survey from the National Landlords’ Association (NLA) reported that 20% of its members plan to reduce the number of properties in their portfolio in 2018 – the highest level of intended property sales in 10 years.
On balance, we see rents in Greater London stabilising at or slightly above inflation (RPI) over the next few years. In high value locations, rental values are likely to remain under downwards pressure until supply more closely matches demand.
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