Sales Market – Year End 2012
RETURN OF AN AUTUMN MARKET
The residential markets in Midtown, City and Docklands were eerily quiet throughout most of July and August but we had been prepared for that. The Olympics, following close on the heels of the Queen’s Jubilee, were always expected to distract attention from most other activities, including thoughts of purchasing a property. But the aftermath of the Olympic triumph proved to be a potent force in the residential markets.
Sentiment shifted in the mainstream media from cynical selfdeprecation – the usual British condition – to self-belief and national pride. For us, something positive happened in the last week of August – confidence sprang back – which caused a steep rise in enquiries in all our offices as well as a record number of hits on the Hurford Salvi Carr website; there were many more viewings and a far greater probability of viewings converting into sales as the pace quickened. In essence, the residential sales market turned. It seemed that all concerns about the condition of the wider UK economy, or the continuing uncertainty in the Eurozone, were forgotten.
For the first time since 2006, we had a tangible ‘autumn market’ and the return of properties going to ‘best bids’ with multiple buyers competing to secure the purchase. An autumn market is always short – a 6 week period, from the end of the summer until the clocks go back at the end of October, but this year, committed buyers were out in force. 62% of buyers in Midtown and City were able to pay cash in 2012, up from 54% the year before. In Docklands the proportion of cash buyers is around 15%. Nevertheless, the number of 100% cash buyers is still lower than it was in 2009 when there was a perception that the banks would not lend and cash was the only realistic option.
But it was not a return to the excesses of 2011 when the market in our view began to overheat. Then, prices were rising at a pace that did not seem to relate to the fundamentals of the market and, although growth continued in the first quarter of 2012, the market had slowed considerably by Q2.
The growth generated in autumn 2012 was at a more sensible pace and therefore likely to be more sustainable. In fact the annual growth in capital values of residential property has been relatively modest in 2012 by historic standards, at 5% for a 1 bed apartment in the resale market, taking the average price to £405,000 (excluding New Homes) at the end of the year (table 1).
The London residential market rarely forms neat patterns of price change and 2012 was no exception. Despite the boost to the market in the autumn, most of the annual growth occurred in the first quarter of the year when pressure was strong from Far Eastern and European buyers seeking a safe haven for their currency. By June however, we noted price reductions in the resale market to adjust for overly optimistic pricing by owners and agents. While prices in Midtown rose by 5.0% in 2012, and 5.5% in the City, Docklands prices rose by only 3% over the year and that increase occured in the first half of the year – in other words, there was no uplift in Docklands values at all in the second half of 2012 (table 2). In Docklands, and only in Docklands, prices still remain below the level of the 2007 market peak (table 3).
In the early part of 2012, there was a clear shift in buyer demand eastwards to the City. The City has become liveable, just as Midtown became liveable 15 years ago. It has the full range of convenience stores and the foundations of a number of village-like communities – albeit still immature compared with the more established markets. The key determinants of price within this broad geographical area are: quality of development; locality and street-scene.
Sentiment is ‘on the pulse’ in all of these markets. Unlike most residential markets, this one is not driven by the usual demographic indicators – births, deaths and marriages, it responds to business and economic confidence and changes in discretionary spending power. Levels of activity generally fluctuate in tandem with the FTSE 100. On 12th December the FTSE reached 5941 close to the year’s high of 5966 recorded on 16th March 2012. In August 2007, as soon as the US sub-prime market imploded and Northern Rock collapsed, these London residential markets stopped trading – it was immediate. We knew that we would return in September to a moribund market and we did. It is because the buyers in this market are discretionary. So when the mood swings low, the buyers retreat.
The 7% stamp duty band introduced in the March budget for homes over £2 million, had a marked impact on the volume of sales in this price bracket. According to the Land Registry, sales of between £2 million and £5 million in London in Q3 2012 were down by 53% compared with the same period in 2011. Across Midtown, City and Docklands, enquiries for homes above £2 million were considerably down on 2011.
Residential properties worth more than £2 million, bought using corporate structures, will be liable for Annual Residential Property Tax (ARPT) that starts at £15,000 p.a. for properties valued at between £2 million and £5 million. Exemptions announced in the draft Finance Bill on 11th December confirmed that landlords and devleopers who buy in corporate structures could reduce the duty to 7%, the same rate as individual purchasers of properties worth more than £2 million pay.
More stock came to the market in the 2nd half of 2012 in new developments, which eased the pressure on supply, but welldesigned and well-presented schemes sold very quickly, as we illustrate in the New Homes section. Mortgage rates remained competitive for buyers with large deposits but lenders have remained highly averse to risk and have continued to prolong the conveyancing process by insisting that a second solicitor review the documentation before they will release funds.
There was a wide range of buyers in the market in 2012. Overseas buyers originated predominantly in Asia and Europe, where France and Italy were the key nationalities. UK buyers ranged from investors looking out for buy-to-let opportunities: to those searching for a pieda- terre for part time occupation and first time buyers, who were often assisted by ‘bank of Mum and Dad’.