UK’s Two-Faced Housing Market

In the United Kingdom, it appears that the housing market has two faces: London and everything else. London’s real estate prices continue to climb with mortgage burdens sitting …

In the United Kingdom, it appears that the housing market has two faces: London and everything else. London’s real estate prices continue to climb with mortgage burdens sitting at a whopping 35.7% of annual income, while prices continue to fall in Scotland, Ireland, and some of England’s outlying regions. High foreign demand, an ascent as a global business hub, low interest rates and too few new units have all given London real estate a strong boost. The government has taken heat for not doing more to even the scales, but a weak economy and other factors make it likely the UK will remain a two-tiered market for some time. For more on this continue reading the following article from Global Property Guide

The UK housing market remains weak.  But with the UK economy on the edge of another recession, the surprise is that the housing market has not fallen more.  And central London is booming. 

  • UK house prices dropped 0.05% (-2.76% inflation-adjusted) during the year to end-February 2013, to an average of £162,638 (US$246,416), according to Nationwide.   Since the end of 2008, UK house prices have either fallen, or increased minimally. 
  • But the national figures conceal wide regional house price disparities.   London prices have soared in recent years, and continue rising.   The wealthier Southeast of England is doing well while the North and North West are in a mess.

From 2009 to 2012, London house prices rose by 8%, based on figures from Halifax. It was followed by South East (5%), East Angalia (4%), South West (2%) and East Midlands (1%). On the other hand, Northern Scotland registered the biggest drop of 28% over the same period. Other regions which saw house price falls include Scotland (-10%), North West (-5%), North (-4%), Yorkshire and the Humber (-3%), Wales (-1%), and West Midlands (-1%).

High demand from foreign buyers, who own more than 50% of properties in many central London boroughs, has fuelled the rise, as has the continued dynamism of London as a financial centre.

Kensington and Chelsea, one of London’s most expensive residential boroughs, was the country’s best performing housing market in March 2013, with prices soaring by 15.8% y-o-y to an average of £2,316,256, according to Rightmove.

"It is the strength of demand from overseas buyers that has driven up prices in central London boroughs and underpin this market," said Lindsay Cuthill, the head of Savills Fulham. "Prime areas – like Chelsea, Westminster, Hammersmith, Camden and Fulham – have a relatively low correlation with the rest of London, let alone the rest of the country, suggesting they really are in a world of their own."

  • Residential property transactions rose by 5% to 930,000 in 2012 from the previous year, according to the Council of Mortgage Lenders (CML).  The 3,693 units sold in the fourth quarter of 2012 was the highest since the last quarter of 2007.   In 2012 the number of mortgages in arrears (2.5% or more of outstanding balance) dropped by 2.7% to 157,000. Likewise, repossessions fell by 6.2% to 35,000.

Scotland, surprisingly, registered the highest year-on-year house price increase, with a 6.7% house price gain in 2012  (2.7% inflation-adjusted), though the tide has turned since then.   Northern Ireland saw an annual decline of 18% in 2012  (-7.2% inflation-adjusted).


Yorkshire and the Humber-2.0-1.1
North West1.5-4.8
East Midlands1.3-4.9
West Midlands-0.8-4.9
East of England-1.8-4.6
South West3.52.0
South East0.1-2.6
Greater London-2.0-4.2
Northern Ireland-18.0-7.2
Source: Global Property Guide


The rise in prices in London has some alarming features.  In Greater London the average mortgage repayment burden now stands at 35.7% of income, followed by the South West at 34.9% and the South East at 34.4%. 

Northern Ireland had the lowest mortgage repayments burden at 20.3% of income.  Nationally, mortgage repayments as percentage of income rose to 28.1% in 2012, from 27.5% in 2011, according to the Halifax mortgage affordability index. 

UK house prices have held up relatively well due to four factors:

  • Immigration and population growth have been strong, especially in London.
  • Interest rates have been at record lows, with a large expansion of the money supply through “quantitative easing”.
  • The City of London (London’s financial centre) continues to boom.
  • Construction activity remains very weak. The output of new private houses fell 4.5% to £13.36 billion (US$20.24 billion) in 2012, according to Office for National Statistics (ONS).  Construction of new public housing dropped 18.7% to £3.6 billion (US$5.45 billion).

Nationally, UK house prices will likely remain static in 2013, according to  Rightmove, Nationwide and the National Association of Estate Agents.  The Royal Institution of Chartered Surveyors (RICS) actually expects UK house prices to rise by about 2% in 2013.  It also predicts property transactions will increase by 3% , repossessions will fall below 35,0000 and housing starts edge up to about 115,000 in England.  But locally, house prices in Northern England, Scotland and Wales are projected to drop further by up to 4% in 2013.

"Conditions are likely to remain as they are.  In 2013 prices are again likely to end the year at levels close to where they begin, with the market continuing to lack any genuine direction," said Martin Ellis of Halifax.

Government under fire from economists

To buoy the economy, the government has announced the following measures:

  • Newbuild house buyers will get government help with their deposit, worth up to 20% of the value of the property, interest-free for 5 years.
  • A mortgage guarantee program will be set up to assist buyers of homes worth up to £600,000 (US$909 ,000), backed by up to £12 billion (US$18.18 billion) in government guarantees
  • The government will also provide £3 billion (US$4.55 billion) emergency loans for the construction sector.

These measures have been strongly criticized in the financial press.  They do not relieve the housing shortage.  They will push house prices up.  “It’s a bold move, perhaps a desperate one, but one that will be undeniably welcome by the beleaguered construction industry,” said Richard Threlfall of KPMG.

The government is resorting to inflating asset values, in the hope that rising wealth in richer households will create a “trickle down” effect.  Its commitment to fiscal austerity has had a depressing effect on the UK economy, but it refuses to admit that more fiscal stimulus is needed.  Hence the housing measures.  “The government has finally recognized that housing might offer the fastest-acting pain relief for our economic woes,”  says Threlfall.

No interest rate hike

Expectations for a rise in the Bank of England’s (BoE) base rate to 0.75% did not materialize, as the BoE decided to keep its record low base rate of 0.5%, in place since July 2011, despite an inflation rate twice the 2% target till December 2011. The low rate will probably remain unchanged until August 2012 according to British Chamber of Commerce (BCC) Chief Economist David Kern. Moreover, an increase of benchmark rate to 1% is expected in Q4 2012 and to 2.25% by end of 2013. Even though the headline CPI remains above the target of 2%, it is a rather improvement from 2011’s average rate of 4.48%.

At the beginning of 2012, the BoE implemented a further £50 billion (€60.12 billion) of quantitative easing. The UK suffers from high unemployment, which rose to 8.4% of the working population, to 2.67 million, according to January’s Office for National Statistics (ONS) report. Economic activity only grew by a 0.8% during 2011, a decline from 2.1% growth in 2010.

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The UK’s credit ratings are on the verge of being downgraded from AAA by Moody’s and Fitch. Both have a negative outlook for the UK, warning that the UK should stabilize its public debt at around 94% of GDP by 2014-2015. By the end of January 2012, if financial interventions are included, UK public debt was around 147.3% of GDP.

From boom to doom

In UK property prices peaked in Q3 2007, after huge rises from 1996-2007:

  • Prices in Northern Ireland rose by 458.6% from Q3 1996 to Q3 2007 (361% in real terms), the highest rise 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 the 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 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.

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 house prices dropped by 19.8% (-23% in real terms).

In Q4 2011, the average London house price was 1.08% up on the previous quarter (0.08% in real terms):

  • House prices averaged £247,058 (€297,069) in Outer Metropolitan London, and £198,363 (€238,517) in the Outer South East.
  • Northern Ireland has the cheapest average house prices at £113,614 (€136,612).
  • East Midlands, Yorkshire & Humberside, North West, Wales and Scotland have relatively cheap house prices, at around £134,000 to £140,000 price range.

Historic low key rate remains unchanged

The Bank of England’s (BoE) key rate has remained unchanged at 0.5% for the past three years. It is the lowest rate in the BoE’s history. The rate is forecast to remain unchanged up to 2015, according to Vicky Redwood, chief UK economist at Capital Economics. Redwood also believes there is the possibility of a bank rate cut to 0.25%.

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%.

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 January 2012, average interest rates for types of mortgages with 75% loan to value (LTV) were:

  • 3.27% for 2-year fixed rate mortgages (FRMs)
  • 3.77% for 3-year FRMs
  • 4.18% for 5-year FRMs
  • 3.19% for discounted rate mortgages
  • 3.57% for tracker mortgages
  • 4.16% for SVR mortgages

Mortgage market nearing recovery

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.

Tighter lending conditions and declining demand for prime lending is reflected by the outstanding lending’s meagre growth of 0.5% in 2011. Mortgage lending declined to 81% of GDP, from 85% in 2010. 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.

There was a welcome rise in secured lending at high LTV ratios in 2011. Lenders expect a further slight increase in the availability of secured credit to households in Q1 2012, especially for high LTV ratio borrowers, according to the BoE’s January 2012 “Trends in Lending”.

Although down by 14% from £12.2 billion (€14.7 billion) in December, mortgage lending in January 2012 was, at £10.5 billion (€12.6 billion), a 10% increase from January 2011’s £9.5 billion (€11.4 billion) total.

This was the 6th month in a row of higher y-o-y lending volumes, according to the CML, but it may be due to temporary factors. It was announced in November 2011 that the stamp duty concession will end on March 24, 2012. The concession exempted first-time buyers from stamp duty on properties up to £250,000 (€300,607).

A“NewBuy scheme” was introduced in March 2012 whereby Barclays, NatWest Home Loans Ltd and Nationwide Building Society offer mortgages of up to 95%, with government support for 100,000 NewBuy properties over three years.

NewBuy operates through cash contributions from builders into a fund to offset the lender’s loss if a borrower defaults and the property can’t be sold above its mortgage value.

Low rental yields

The South West has the UK’s high rental yields at 5.24%, followed by the North West (5.13%) and the combined area of Scotland, Wales and Northern Ireland (5.12%). Prime Central London and has lower yields at 4.88%, and the “Rest of London” has yields of 4.81%. The Midlands does relatively poorly too, at 4.98%. Rental yields in UK fell slightly in the last quarter to 5.02%, from 5.15% in Q3 2011, according to the Association of Residential Letting Agents (ARLA).

Despite strong rental demand, rental growth is moderating, after rather sharp growth during early-2011 because of rising new residential lettings supply.

Rent increases are still occurring in the South East, while rents in London, the South West and the North have stabilized. Nationally, the rental outlook revealed ARLA’s survey is positive (meaning more surveyors believe that rents will increase), but London and the East recently had the first negative net balance since July 2009.

Gross rental yields on flats in Prime Central London range from 4.31% to 4.86%, according to the June 2011 Global Property Guide rental yields survey, with smaller units earning the highest returns. For other luxurious areas in London, gross yields range from 4.10% to 5.54%.

Low housebuilding activity

The UK’s per capita housebuilding rate falls short of international standards, and failed to respond to booming house prices during the boom, due to building regulations and planning constraints. The situation improved during the later years of the boom, but output declined again during the recession. Ironically, this has prevented the housing market suffering a large overhang of properties, a fate shared both by Ireland and Spain.

Increases in population, immigration, and changes in household sizes have all added to the pressure. Despite rapid rise in house prices between 1996 and 2002, housebuilding actually fell during this period. The amount of available land for housebuilding, and the long processing time for development permits, both discourage new building.

A reform of the planning system, relying on local initiatives, is under way to speed the system up and expand the housing supply. Extra funding for local government, depending on the number of new local home units built, is available.

However, the government’s budget constraints are putting all this under threat.

The government is targeting around 240,000 new dwellings annually until 2020. However, the target seems possibly unrealistic, since output over the past 20 years has been around 150,000 dwellings annually. RICS therefore suggests that the long-term outlook inevitably involves severe housing shortages and increasing house prices.

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 suggests that the housing deficit may reach one million by the end of 2010.

Homebuilding stagnated at an average of 186,000 new units annually between 1991 and 2003, and from 2004 onwards barely exceeded 200,000 annually (222,490 in 2007). In 2008, the credit crunch combined with falling house prices reduced house building, and less than 100,000 completions took place in 2009.

Construction activity remains very weak in 2012. The output of new private houses fell 4.5% to £13.36 billion (US$20.24 billion) in 2012, according to Office for National Statistics (ONS).  Construction of new public housing dropped 18.7% to £3.6 billion (US$5.45 billion).

UK economy remains fragile

UK´s real GDP declined by 0.3% in the final quarter of 2012, mainly due to austerity measures, higher energy prices, exacerbated by the ongoing eurozone debt crisis. Overall, the economy grew by just 0.2% in 2012, from a real GDP growth rates of 0.8% in 2011 and 1.8% in 2010, according to the Office for National Statistics (ONS).

In 2012, the service sector, which accounts for about three-quarters of the economy, contracted by 0.1% while the production sector shrank by 1.9%.

The British economy is expected to grow by just 0.6% this year, half of the initial forecast of 1.2% growth, due to lower-than-expected exports, according to the Office for Budget Responsibility (OBR).

Chancellor George Osborne has pointed to the region’s debt crisis, highlighted by the bailout discussions for Cyprus, to explain why the UK economic recovery was “taking longer than anyone hoped”.   Most economists, however, blame instead Osborne’s insistence on fiscal austerity.

In February 2013, the budget deficit fell to £2.76 billion (US$4.2 billion) from £11.76 billion (US$17.8 billion) in the same period last year, mainly due to the proceeds from the sale of fourth-generation mobile spectrum and after the Treasury received a second installment of cash from the BOE, according to the ONS. The deficit is expected to fall to 7.4% of GDP this year from 11.2% of GDP in 2009/10.

UK’s public sector net debt was at about 73.5% of GDP in February 2013. Net debt is expected to peak at 85.6% of GDP in 2017, according to the OBR.

In January 2013, overall unemployment rate was 7.8%, unchanged on the quarter but down from 8.3% in a year earlier. However, the total number of unemployed persons increased by 7,000 to 2.52 million in January 2013, from November 2012.

The  average earnings of workers rose by 1.2% in January 2013 from the same period last year. But the increase is just less than half the inflation rate, which means that average earnings actually fell in real terms.

"The situation [in the UK] is still fragile. I think the policy course, both in terms of monetary and fiscal policy, is going in the right direction and improvements are beginning to be seen", said Pier Carlo Padoan, the OECD´s chief economist.

This article was republished with permission from Global Property Guide.


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