National market events and policy Spring 2018

Published: 29/05/2018

The mortgage market

The mortgage market seems to have a pretty bright future at the moment. Even with interest rates starting to rise, they remain close to historic lows, and that has boosted competition in the market. Add to that the resilience in the jobs market and broader economy and that represents a strong foundation for future growth. A big surprise for some has been the number of first-time buyer numbers in 2017, helped in no small way by help-to-buy, but also the good credit availability, and competitive mortgage rates. Stamp duty relief for first-time buyers announced in November 2017 will further support growth throughout 2018.

The bread-and-butter of the mortgage market, home mover and remortgage activity has been stronger than expected and has exceeded many gloomy expectations.

Buy to let activity has been weak, with activity back in 2012 territory and looking unlikely to recover in 2018 or 2019. This is no surprise given the less-than-comfortable tax environment which was ushered in by the last Chancellor in the form of mortgage tax relief withdrawal and higher stamp duty.

Overall, property transactions have recovered somewhat over the course of 2017 helped by first-time buyer numbers, but this only represents a recovery to short-term levels rather than growth. Looking ahead, we expect overall activity to be flat over the next two years, as the cycle transitions.

House building

When George Osborne announced in his 2013 budget that Help-to-buy would be “the biggest government intervention in the housing market since the Right to Buy scheme” of the 1980’s, many commentators dismissed it as typical government superlative. However, five years of data show us that it has profoundly affected the housing market, particularly the new build sector at which it is aimed.

It aimed to undermine the obstacle to homeownership represented by deposits. Between spring 2013 and summer 2017 it has helped over 130,000 families buy a home, 80% of which were first-time buyers. The principal house builders were arguably even more significant winners, with the sectors’ share prices outperforming the FTSE by 30%. Still, the primary outcome of the scheme has been to boost house building rates.
As something of a side-note, it’s worth mentioning that housebuilding is one of a tiny number of areas within the housing industry which is likely to be immediately and directly affected by Brexit, with its reliance on appropriately skilled nondomestic labour.

We expect that the scheme will be continued in one form or other because it has been proven to boost home-ownership, supports jobs growth (in construction) and is one of the few government policies over the last few decades which has had a positive effect on house building.

The rental market

The big story with rent levels is one of lethargy; however, there are two forces in play which could see that turnaround. Firstly, the national rental markets have been digesting a considerable glut of property which came on to the rental market shortly after spring 2016. Investors bought forward decisions to purchase homes before April 2016 to avoid paying an extra 3 per cent in stamp duty. In fact, in March 2016 there were about twice the number of sales than the same month the previous year equivalent to 70,000 homes, the majority of which would have found their way into the rented sector. A sudden increase in supply of almost 2 per cent has had the predictable effect of putting downward pressure on prices.

However, it is this process which gives us reason to believe the impact might reverse. The less comfortable tax environment may well put off some would-be landlords and limit the future supply of homes in the rental market. This would play well for the ‘build-to-rent’ sector which has the potential to play an invaluable role, but the funding of it requires strong rental inflation. The second reason is wage growth. The lack of it has held back rents because it forms a ceiling beyond which landlords just can’t price their units. A rosier economic picture is starting to emerge, not least on the news that wage growth is starting to get going. Two reasons, therefore, why rental growth has suffered but looks set to flourish.

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