TRANSACTION NUMBERS RISE
After five years of downward pressures on prices, the market stabilised in 2019. Encouraging signs of recovery emerged in the summer months with viewing numbers, offers received and sales agreed all above levels recorded in any of the previous 3 years. There were vendors who had tried unsuccessfully to sell their properties for up to three years, who finally secured sales in 2019.
One reliable indicator of change, is the state of the listings websites. In the years from 2016 to 2018, price reductions dominated the portals but in 2019 “under offer” flags became more widespread than “price reductions”.
However, this all happened against a backdrop of low transaction volumes. Many owners remained reluctant to list homes for sale while prices were low and uncertainty prevailed in the economic and political climate. Passing yet another Brexit deadline on October 31st, took its toll and the market paused again, then the announcement of a General Election was enough to ensure that activity would stay subdued to the year end.
The price tracker (figure 1) shows that all three of our markets have experienced a similar trajectory with prices stabilising at levels last recorded around 2013.
It is worth repeating that owners in our markets are rarely forced sellers and throughout the downturn in the market, the supply of properties for sale has remained low. Political uncertainty has only served to exacerbate that position, making owners even more reluctant to crystallise values. With bank interest rates on deposits at an all time low, owners have little incentive to accept an offer that falls below a 5% margin of the asking price.
A Conservative majority with a five-year term ahead, forms a solid base for the housing market and the renewed confidence and national ‘sigh of relief, will create the conditions for future growth. Prospective investors, for instance, who had postponed decisions until they knew whether to expect rent controls, will now be stirred into action.
Certainly, 2019 presented opportunities for buyers who were prepared to act and owners with a need to sell, were likely to find a buyer. Lower prices and low interest rates will always make a heady combination for the confident buyer.
During the second half of 2019, there were examples of properties attracting multiple offers. It is not an epidemic, it is not even a trend but, for the first time in many years, we experienced contract races and have sold properties at asking prices.
The price of an average one bed apartment in our markets fell by around 2% in 2019, following a loss of 8.5% in 2018 and 4.5% in 2017, that cumulative loss took the average price of a one bed apartment in our markets back to £475,000 – a price last seen in 2013 – and 15% below the peak of the market in 2016. (Table 1)
The average one bed figure is taken across all of our markets, Midtown, City and East London and it disguises considerable differences, although the average percentage fall from the peak in 2015/16 is fairly consistent for one and two bed units, at around 15% (see table 2) in Midtown and East London and a little better in The City where values fell by around 10%.
In all three areas, larger units have taken the brunt of the losses, most markedly in Midtown where the price of a three -bed penthouse is almost 40% below its peak. Larger units, with higher price tags, suffered most from the punitive changes to Stamp Duty in December 2014 and it has inevitably flowed through to prices that can be achieved.
Sales volumes for London as a whole, fell some 33% below the peak of the market. Prime areas were hardest hit, with sales in the first six months of 2019, (on a rolling twelve-month basis) lower than they were at the height of the global financial crisis and at half the level experienced at its peak.
It is no surprise that annual Stamp Duty take from London was low in H1 2019, when compared to the previous year. In the financial year to the end of April there was a net reduction of £380 million (2018/19 versus 2017/18), making the capital responsible for half the total loss across England as a whole (£750 million). However, there was an uptick in Q3 2019, with sales in prime London up by 2.5% (again, a rolling 12 month basis) according to LonRes.
Across England as a whole, predicted Stamp Duty intake from residential sales between July and September up by 0.4% year on year at £2.35 billion, and the number of liable transactions over £1 million rose to its highest quarterly level in two years. All of which supports our assertion that activity levels improved in 2019, even if they remained low overall.
Turnover in our markets, at around 5,000 sales per annum, represents around 5% of the total volume for Greater London but it is disproportionately affected by Stamp Duty because it is a high value market.
A two bed apartment in Midtown, sold at the average price of £850,000 would attract Stamp Duty liability of £32,500, for second home owner, it would be £50,000. An investor buying a penthouse or 3 bed apartment in City or in Midtown can expect a Stamp Duty bill of well over £100,000. There is no doubt that Stamp Duty has suppressed demand and driven down prices for larger homes in our markets.
There is a strong lobby group in London to reduce the top rates of Stamp Duty, arguing that the tax has suffocated transaction volumes and the government is missing out on revenue. However, the statistics on Stamp Duty take suggest otherwise. In 2013/14, before the introduction of big Stamp Duty increases, the Treasury received £6.45 billion from Stamp Duty on 1.13 million residential transactions. In 2018/19, the tax yielded £8.37 billion for the Treasury, from 1.04 million transactions. In other words, the number of transactions may have fallen but the revenue is higher.
We compared the cost of Stamp Duty with annual rent because this is a choice that many prospective buyers are faced with if they are in London on a relatively short term assignment. Before Stamp Duty changes in 2016, it was quite usual for a family living in London for 2 or 3 years to invest in buying a home in the capital but today, the Stamp Duty alone on a three bed home in the City, would fund rental costs for almost three years.
For overseas investors the other consideration is the Sterling exchange rate. Since Sterling lost value against the dollar in the wake of the EU referendum, the buying power of many currencies has offered a significant advantage to overseas buyers and certainly off-sets the Stamp Duty for most.
An analysis of currency advantage for non-sterling buyers based on prices and Stamp Duty in September 2019 for a second home buyer, shows that a dollar-denominated buyer would have 20% more spending power than a UK buyer. Currency advantage helps to off-set Stamp Duty even for a property over the £937,500 Stamp Duty threshold, below that price the advantage is significant.
In the City, which has been transformed as a residential market in the past decade, price growth since 2007 is more than 50% but in Midtown, which was already an established market, the rise in 12 years is around 28%. A comparison with capital value growth since 2008 shows the opportunity presented by buying in a weak market. A City buyer in the immediate aftermath of the global financial crisis would have seen their capital grow by 66% compared to 50% and over a shorter period (by one year). Similarly, in Midtown, the same comparison would be 40% over 11 years versus 28% over 10 years.
An unforeseen outcome of a long period of low transaction volumes, is that legal practices reduced the size of their conveyancing teams. The loss of experience and headcount has noticeably slowed the process between offer accepted and exchange, especially as lenders have also become more cautious. The time taken to exchange contracts has risen to around 4 months, with local authority searches taking up to 8 weeks.
In December the Royal Institute of Chartered Surveyors (RICS) published requirements for owners of blocks of more than six storeys (18m) to get a new External Wall Review certificate.
The external wall review procedure comes after it was disclosed in October that the owners of at least half a million flats have been unable to sell their proprieties or change mortgage because surveyors working for lenders were valuing the flats at zero value amid uncertainty about the safety of cladding.
The government is spending £600 million to remove the type of cladding used at Grenfell Tower from about 300 blocks but there are concerns that other forms of cladding might also be unsafe.
Mortgage valuers will now check whether the building had an External Wall Fire Review certificate, which has to be commissioned by the freeholder from a fire safety inspector. In the majority of cases the cost of the reports are expected to be funded through the service charge.
Although a certificate would not be a legal requirement, valuers reserve the right to declare a property worthless without one. The certificate would have to be renewed every five years.
The Association of Residential Managing Agents (ARMA) have written to its members to ensure that owners organise test certificates to assist leaseholders sell and remortgage their flats.
The government consultation on leasehold reform has been an additional drag on the conveyancing process. There is all party agreement that there will be regulation to deal with new ground rents and existing lease structures.