Prices for real estate in the UK have been falling since the global financial crisis shook the industry in 2008, and the trend continues. Many areas in the UK such as London, Northern Ireland and Scotland saw massive spikes in property values from 1996 through 2007, some even as high as 310% or more. Now, those same areas are seeing declines of as much as 41%, as in the case of Northern Ireland. The good news is that interest rates are at an all-time low, the mortgage market is improving and a housing shortage will force market movement. For more on this continue reading the following article from Global Property Guide.
House prices in UK have trended down so far in 2011, after a short-lived surge last year. Average UK house prices were 0.31% down (-5.42% in real terms) during the year to end-Q1 2011, according to Nationwide. Surveyors continue to report falling prices, say the Royal Institution of Chartered Surveyors (RICS).
Forecasting the UK’s housing is now extraordinarily difficult:
- Negatives: the coalition government is imposing severe spending cuts
The economy is stagnant, and inflation has been rising.
- Positives: interest rates are at record lows. There are new tax breaks for the house buyers. Rents and yields are rising strongly, and new housing supply is very weak, due to regulatory constraints.
Jones Lang LaSalle expects that transaction volumes will remain flat throughout the year, and that prices will decline by 1% in 2011 before stabilising in 2012, followed by growth of around 6.5% between 2013 and 2015. Demand, transaction volumes and activity levels are unlikely to recover in the short run.
Forecasts that the Bank of England’s (BoE) base rate might rise to 0.75% by May this year have not been borne out. The present base rate is at an all-time low of 0.50%. Inflation is up – the UK’s headline CPI rise was 4.5% in April, more than double the BoE’s 2% target rate. However the UK also suffers from high unemployment and weakening output. In March 2011 the unemployment rate was about at 8%, or 2.53 million people, the highest number of unemployed since 1994.
"Underlying activity in the economy remains pretty much stagnant," says Vicky Redwood, economist at Capital Economics. UK’s economy grew by a mere 0.5% in the first quarter of 2011, an improvement from the previous quarter, which saw a 0.5% contraction. The manufacturing sector remained strong with 1.1% growth while construction dropped by 4.7% at the same period.
Down from the peak
UK property prices last peaked in Q3 2007, after rising more than 200% from 1996-2007.
- Prices in Northern Ireland rose by 458.6% (361% in real terms) from Q3 1996 to Q3 2007, the highest among all the UK regions
- Prices in London rose 310% (238% in real terms) during this period.
- Price increases in other regions during this period ranged from 194.5% (143% in real terms) for Scotland, to 266% (202% real) for Outer South East.
- The national index rose 259% (196% in real terms) over the same period (all figures from Nationwide).
In early 2007 interest rates were raised, and lending conditions were tightened. House price falls accelerated in H2-2008, due to the global financial meltdown and the economic recession. The collapse of Iceland’s banking system led to substantial losses for around 250,000 British depositors, exacerbating the situation.
The regions that experienced the highest price rises during the boom, generally had the biggest price falls from Q3-2007 to Q1-2009.
While nationally the average house price fell by 10.3%, London house prices dropped by 19.8% (-23% in real terms). The biggest drop occurred in Northern Ireland where house prices fell by 39.8% (-42% real) during the year to Q1 2009. House price falls in other regions ranged from 14.1% (-17.85 real) for Scotland, and 25% (-21.7 real) in East Anglia.
London has the highest average house prices in the UK. In Q1 2011, the average house price in London was 1.31% up on the previous quarter (-0.15% in real terms), at £286,658 (€321,788).
- House prices averaged £241,573 (€271,178) in Outer Metropolitan London, and £192,571 (€216,171) in the Outer South East.
- The North has the cheapest average house prices at £113,863 (€127,817).
- East Midlands, Yorkshire & Humberside, North West, Wales and Scotland have relatively cheap house prices, at around £134,000 to £140,000 price range.
Key interest rate at historic low
The Bank of England’s (BoE) key rate has remained unchanged at 0.5% since March 2009, the lowest rate in the BoE’s history. Though a recent BoE report has suggested that key rates would probably rise this year, the Monetary Policy Committee will first want to see signs of a sustainable recovery, and as yet there is little sign of this.
From 2002 to 2006, the key rate fluctuated from 3.5% to 5%. In 2007, it was raised three 25 basis point steps, leading to a rate of 5.75% in July. Then came the crisis, and in November 2008 the BoE had the biggest rate cut in its modern history, with the key rate slashed 1.5 percentage points to 3%.
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Mortgage interest rates have not tracked the BoE’s key interest rate down fully. Interest rates on housing loans were between 5.5% and 6.5% between 2007 and 2008, which the exception of standard variable-rate (SVR) mortgages. Mortgage interest rates then started to inch downward in mid-2008, but the spread between the key rate, and the average mortgage rate, has widened to around 3 – 5 percentage points, from less than one percent in 2006 – 2008.
In March 2011, average interest rates for types of mortgages with 75% LTV were:
- 3.7% for 2-year FRMs
- 4.48% for 3-year FRMs
- 5.11% for 5-year FRMs
- 2.9% for discounted rate mortgages
- 3.51% for tracker mortgages
- 4.05% for SVR mortgages
Mortgage market recovering
During the financial crisis many lenders lowered LTV ratios, according to the Council of Mortgage Lenders (CML). By Q3 2010 the average LTV ratio was 77%, with the result that the average new buyer was paying 94% of his income, as deposit on his house purchase.
This was in dramatic contrast to the boom era, when UK banks commonly extended 90% LTV ratio loans to first-time buyers. In Q1 2007, the average buyer was paying only 37% of income as a deposit.
Little wonder that as credit was tightened, outstanding lending juddered to a halt, growing by a meagre 0.4% in 2010 to £1.240 trillion (€1.392 trillion), with mortgage lending remaining 85% of GDP – the same ratio as the previous year. In contrast, between 2001 and 2007 outstanding secured lending volumes had risen by more than 10% annually, from 55% of GDP in 2000, to 85% of GDP in 2007.
However by Q1 2011 borrowers with high LTV ratios were again getting credit more easily, according to the BoE’s April 2011 “Trends in Lending” – and the BoE expects this to continue.
In Q1 2011, new gross mortgage lending reached £30.1 billion (€33.8 billion), a mere 1% up on the same quarter last year, but a considerable improvement from the 13% annual decline during the year to Q4 2010.
“The housing market has emerged hesitantly from hibernation,” says CML chief economist Bob Pannell. “Household finances are under a lot of pressure, and as a result demand for house purchase loans fell in the first three months of 2011. Lenders expect mortgage credit availability to improve this quarter, and this should help to underpin house purchase activity albeit at pretty low levels.”
Remortgaging is picking up, partly due to the introduction of new products and enhanced competition in Q4 2010. Media coverage has encouraged households to shift mortgages from variable to fixed-rate.
Likewise, according to Pannel, “Remortgage demand…continues to firm, presumably linked to expectations of higher base rates. Remortgage approvals in February were the highest for more than two years. Stronger remortgage activity looks set to continue propping up overall lending”.
Rental yields rising
The UK’s rental yields for all properties rose to 5.14% in Q1 2011, from 5.04% in the previous quarter and from 5.09% in the same quarter last year, according to the Association of Residential Letting Agents (ARLA). Rental yields were highest in the “Rest of London” at 5.82%, followed by North West (5.66%) and the combined area of Scotland, Wales and Northern Ireland (5.27%).
The increase was made possible by a nice mix – very strong tenant demand, and falling property supply.
Strong rental growth is seen in London and the South East, while falling rents are reported in the South West. Surveyors forecast that rents will continue to increase modestly in the South West and in London.
Prime Central London had the country’s lowest gross annual rental yield in Q1 2011, at 4.80%, but these yields were strongly up on Q1 2009’s average Prime Central London yield of only 4.37%. Other regions with low yields are the South West (4.90%) and the Midlands (5.12%).
Gross rental yields on flats in Prime Central London ranged from 3.24% to 4.26%, according to the July 2010 Global Property Guide rental yields survey, with smaller units earning the highest returns. For other luxurious areas in London, gross yields ranged from 3.85% to 4.91%.
The UK’s housing shortage
The UK has a problem with building houses – over-regulation. The UK’s per capita house building rates are low, by international standards, and largely failed to respond to booming house prices during the past decade, because of building regulations. Increases in population, immigration, and changes in household sizes have all added to the pressure.
Despite rapid increase in house prices between 1996 and 2002, housebuilding actually fell. The situation improved during the later years of the boom, but output declined again during the recession.
In a discussion paper published in September 2009 by the Town and Country Planning Association (TCPA), researchers warned that at least 250,000 new homes must be built annually to match population growth, to replace the ageing housing stock and the accumulated backlog. Their analysis shows that the housing deficit may reach one million by the end of 2010.
Yet homebuilding stagnated at an average of 186,000 new units annually between 1991 and 2003. From 2004 onwards, new homes built exceeded 200,000 annually (222,490 in 2007), still low compared to more than 300,000 annually in the 1960s and 1970s.
In 2008, the credit crunch combined with falling house prices reduced house building, and less than 100,000 completions took place in 2009.
Although the UK has high owner-occupation and one of Europe’s most market-oriented economies, plus a highly competitive mortgage market, the UK maintains a strongly regulated land market through planning and other state controls over greenfield development, urban regeneration and building densities.
Around 240,000 new dwellings are targeted by the government to be built in England annually until 2020. However, the target seems possibly unrealistic, since output over the past 20 years has been at around 150,000 dwellings annually. RICS therefore suggests that the long-term outlook will involve severe housing shortages and increasing house prices.
2011 budget strongly supports the housing market
In the 2011 budget presented by Chancellor George Osborne there were several measures supporting the housing and mortgage market:
- Lower stamp duty on bulk purchases. Purchasers of multiple residential properties can now pay stamp duty on the mean value of dwellings purchased (subject to a minimum rate of 1%), rather than on the aggregate value. This is expected to encourage investment in residential property and expand the supply of private rented housing.
- Support for mortgage interest (SMI) extended for another year.
- The government will grant £210 million funding in England, and £40 million to the devolved administrations, to support first-time buyers purchasing new-build property, over the next 2 years.
- A new ‘firstbuy’ scheme, which is similar to the previous homebuy direct scheme, will be implemented. Qualified households with less than £60,000 income and a deposit of 5% will be given a 20% equity loan co-funded by house builders and the government. The loan will be free for the first five years, and is repayable on the sale of the property. Homes included in this scheme will be marketed from September 2011.
- The government also intends to legislate in 2012 to support investment in Real Estate Investment Trusts (REITs), including removing the REITs’ 2% conversion charge.
- On the other hand, the government intends to abolish, after consultation, a number of tax reliefs from 2012 onwards, including stamp duty on disadvantaged areas, on shared ownership transactions, and on certain leases granted by registered social landlords.
UK’s economy remained stagnant during the past 6 months, growing by 0.5% in the first quarter of 2011, after a 0.5% contraction in Q4 2010. Major contributors to the UK’s economic growth:
- 1.1% contribution from manufacturing sector
- 0.9%contribution from services
- 1.0% contribution from business services and finance
The construction sector is the largest negative contributor, with a -4.7% contribution.
Unemployment was about 8% in March 2011, at €2.53 million, the highest number of unemployed since 1994.
The Consumer Price Index rose 4.50% y-o-y to April 2011, more than twice as much as the central bank’s inflation target of 2%.
Due to the inflation problem, the base rate could rise to 0.75% this year, from its all-time low rate of 0.50%. And there’s a possibility that the base rate will be at 1% by the end of 2011.
So what will happen if inflation continues to rise – and yet the economy fails to grow?
A weak economy with rising interest rates is not a happy prospect for the housing market.
This article was republished with permission from Global Property Guide.