"Ultimately, the same factors are at play today as have been at play in the market throughout recent history."
The degree of political upheaval experienced over the last twelve months has created a great sense of uncertainty amongst UK markets, and property is no exception. Ironically, the only thing we can be certain about in the current property market is that it is uncertain.
Since Spring last year we’ve witnessed sizeable swings, and even counter swings in a market trying to come to terms with regulatory and taxation change, fundamental alterations to the UK’s future relationship with the EU, a sudden general election, and at one point another potential change in Government.
Prior to the referendum, the residential property market was relatively strong—although in some areas such as central London, it had started to weaken due to a combination of high prices and new regulations. In the six months directly after the referendum the market as a whole remained split: central London remained significantly cooler than the rest of the country. The positive momentum prior to the vote continued to ripple out into more affordable areas, especially eastwards from the capital, while London itself remained volatile and unpredictable.
Unexpectedly however, central London, which experienced the largest falls in price over the short term, is now starting to turn upwards again and prices are looking up compared to their position six months ago. Broadly, sold and asking prices have both seen stable increases compared to six months ago. There are of course exceptions to this trend, and on a more local level that has certainly been the case. For example, the neighborhood north of Queen Street in Edinburgh has seen asking prices fall, whilst sold prices have continued to rise, creating an interesting divergence as shown below.
But what other political factors, aside from major, and largely unprecedented events, are influencing these trends and what implications do they have on the outlook of the property market? Ultimately, the same factors are at play today as have been at play in the market throughout recent history.
Perhaps the most influential issue when it comes to asking and sold prices is supply and demand. The UK is an incredibly attractive location to live, not just for UK nationals but for many people from around the world, for a variety of different reasons. Proposed changes in immigration law, and indeed an expected end to free movement which might appear as a result of Brexit, could potentially reduce competition for housing and thereby prices. As yet however, no government has been able to effectively deliver on campaigns to minimise net immigration, and even the prospect of leaving the EU does not seem to have deterred people from emigrating.
The graph below is an effective visual representation of the correlation between house prices, an ever-growing population and declining construction. In purple, we have an increasing population (demand), and in red an ever-decreasing level of construction (supply) which would point to continued house price inflation as more people compete for more limited space.
Another factor at play is credit availability. The majority of purchases in the UK are not bought outright, but using credit. Interest rates are at historic lows and at the same time the amount of lending has also increased. Most notably there has been a significant uplift in the past three years as can be seen on the chart below, meaning that there are more people with more access to debt financing in the market year on year.
With more people competing for fewer properties, more available credit and low interest rates, one of the few factors negatively impacting the property market is income. Particularly in London and the South East where prices now often equate to over five times annual incomes, affordability is a real problem, regardless of the availability of more credit with extremely low interest rates. Whilst the potentially dangerous lending of the past crash has been vastly reduced with far more stringent restrictions, the high degree of leveraging required to purchase a property means that any potential changes to income tax could pose a further risk to affordability.
The final factor, unsurprisingly, is government regulation. The current government seems to favour the ‘professionalisation’ of the rental sector, and many everyday landlords are finding themselves squeezed out, in place of larger institutional managers and developers. Changes in stamp duty and taxation have already had a significant impact to the viability of a private landlord. With over a third of people in the UK renting, continued disincentives for their landlords to own the property may cause a large number of disposals and ultimately reduce prices. Which is good for buyers, but bad for owners.
In conclusion, whilst there have been some significant swings over the past year, we’re seeing that the difference between sold and asking prices across the UK has started narrowing in recent months. While the unprecedented political upheaval experienced in recent months has undoubtedly had an impact on the UK property market, a number of ongoing political factors including, incomes, credit availability and government policies, also continue to influence the success of the sector.