Predictions for the UK Real Estate Sector: Will Property Values Remain Stationary?
In the UK, the residential real estate landscape, as per Zoopla, has observed a paltry 2.2% increase in home prices over the past year, with flats experiencing an even more pitiful 0.5% growth. While Halifax anticipates an annual house price expansion of 2.9%, Nationwide maintains a more optimistic outlook, recording a 3.1% year-on-year rise for the fourth quarter in England, 2.7% in Wales, 4.4% in Scotland, and a staggering 7.1% in Northern Ireland. But let's not forget the underlying regional variations - prices in the Midlands and the northern parts of England soared by 4.4%, while southern England only witnessed a meager 2% surge, and East Anglia experienced a mere 0.5% rise.
It's important to keep in mind that data from various sources often varies, as they stem from surveys of estate agents, completed deals, or mortgages arranged. The transactions-based data, though, might not be indicative of the market's overall health, as it excludes properties that don’t sell or omits some private transactions. Altogether, it's safe to say this data isn't particularly reliable.
The persistent myth of persistently ascending house prices, interrupted only occasionally, seems to be deeply ingrained in the public psyche. This belief, by extension, influences the behavior of buyers. If one assumes that their properties will always appreciate in value, tax-free, purchasing a larger abode in a pricier location is justifiable - even if it exceeds one's actual needs. The same philosophy applies when buying to rent; one accepts low rental yields, as they'll be supplemented by capital appreciation.
For instance, Nationwide recently reported that prices in late 2024 still lagged the all-time high recorded in the summer of 2022, suggesting that the price hike in the north could’ve been the result of catching up to London and the southeast, as opposed to a sustained growth trend.
Prime Central London - A Stagnant Market
In high-end property segments, such as prime central London, things haven’t been looking too rosy. As Charlie Ellingworth of Property Vision puts it, "The market has been flat in the last ten years. There have been some spectacular sales, but these are exceptions in a generally static market." The high-end market is grappling with the exodus of non-domiciles, accelerated by their inclusion in the inheritance tax (IHT) net in the last budget. Moreover, potential foreign buyers have been put off by various factors.
The Post-COVID Housing Market Dilemma
The countryside market experienced a noticeable surge during the COVID years, which has subsequently subsided, reflecting the retreat from working from home. Despite the internet and remote work making it easier to extend one's weekend and live farther from the city, desirable properties in popular locations continue to attract buyer interest - a tractable reality in London, where major developments offering good transportation links and a diverse mix of shops, eateries, and entertainment venues remain popular. Unfortunatelly, "so many of the riverside developments that future generations will regard as sad failures" are not, unluckily, the case.
Affordability is improving as incomes rise, but the house price-to-earnings ratio remains above the long-term average. Furthermore, this analysis doesn't factor in rising interest rates, which might not drop back to their previous sub-1% levels. This factor should be closely monitored by mortgage borrowers, as many of the low-fixed rate deals are nearing their expiration.
Another overhead for homeowners, first-time buyers, and landlords is the relentless rise of stamp duty. Soon, it will be tax-exempt on only the first £125,000, meaning that a property costing £500,000 will attract a 3% tax, £1 million a 4.4% tax, and the marginal rate will go up from 10% to 12% above £1.5 million. First-time buyers purchasing properties under £625,000 will be subject to a slightly lower tax, while buyers of second homes will have to pay an additional 5%, and non-residents an additional 2%.
With many councils facing financial instability, council tax is poised to increase at a rate higher than inflation. Those owning second homes will have to bear the brunt of double taxation; ten years ago, they were only required to pay half the tax. For flat owners, service charges are skyrocketing rapidly, especially when remedial action for cladding is necessary - an aspect that may explain why the increase in flat prices is lagging behind that of houses.
Investors and landlords focusing on the buy-to-let market face various costs, including the expense of achieving the necessary energy-performance certificates, higher management costs, increased taxation on net income with reduced deductions before net income calculation, and higher capital gains tax upon disposal. This scenario has driven locals in holiday locations to complain about being priced out of the market, as they argue that the tourism industry is essential for their livelihood.
Historically, the allure of buy-to-let investing has extended beyond a reasonable net income, growing in line with inflation, but also the prospect of capital gains. However, if costs, taxes, and regulations erode the net income, the capital gains will disappear. This raises the necessity for a much higher net income, which isn't attractive to buyers, thereby contributing to the persistent high vacancy rates in the sector.
A New Perspective on Housing Investment
Home buyers face a similar situation: if price appreciation is no longer expected, the incentive to purchase the largest property on offer fades away, and there's renewed interest in downsizing in later life. The confidence born out of the expectation of rising prices had been self-fulfilling. Now, the opposite might prevail. A developer succinctly remarked, "Housing for successive governments was like a golden goose - enabling them to tax, tax, and tax again."
Yet despite the housing market's troubles, some challenges remain. The government's ambitious five-year plan to construct 300,000 new homes annually has been met with skepticism, as the industry points to labor shortages, material shortages, and a lack of available sites. Recent changes to planning laws could potentially address the supply problem, withThe Telegraph reporting that "UK golf courses are under attack from Rachel Reeves's build, build, build mantra." The article suggests that "at least one in six of the country's golf courses are in distress, with over a dozen already closing or facing imminent shutdown, making way for new housing developments."
Demand, however, seems to be dwindling; according to Statista, household formation growth has been hovering at an average of 0.6% per year in the last decade, but only 0.4% in the past year, 2023. This figure is quite similar to population growth, so household sizes are no longer shrinking. With the fertility rate now significantly below the replacement level, population growth and, consequently, household formation are heavily dependent on immigration. Given the likelihood of increased restrictions on immigration in the near future, it is safe to assume that population growth and household formation will turn negative, while housing supply will continue to grow. All in all, this won't bode well for housing prices.
Instead of regarding residential properties as investments, one might prudently consider them as permanent living spaces. There will still be deals based on quality, mispricings, and location, but the days of a thriving market bailing investors out for overpaying are, hopefully, extinct.
- The rising interest rates might impact finances for mortgage borrowers, as many low-fixed rate deals are approaching their expiration.
- Investors and landlords focusing on the buy-to-let market face increased costs, such as energy-performance certificates, higher management costs, increased taxation on net income, and higher capital gains tax upon disposal.
- The persistent high vacancy rates in the buy-to-let sector may be due to the erosion of net income caused by costs, taxes, and regulations, which could lead to the disappearance of capital gains.
- With population growth and household formation heavily dependent on immigration, and the likelihood of increased restrictions on immigration in the near future, it is safe to assume that population growth and household formation will turn negative, while housing supply will continue to grow, potentially leading to a downturn in housing prices.