Key Themes for UK Real Estate

Key Themes for UK Real Estate in 2016
 
Residential

10 December 2015, by Lucian Cook

Mortgage regulation seems to have cooled the market, and we expect demand for private rented sector accommodation to rise

 

Despite continued growth in the UK economy and record low costs of borrowing, annual house price growth stood at just 3.9% at the end of October, with annual housing transactions appearing to have peaked at 1.2m per annum (still a long way short of the levels seen prior to 2007).

As we predicted last year mortgage regulation appears to have cooled the market by restricting how much mortgage debt borrowers are able to take on and consequently their ability to get on and trade up the housing ladder.

London

Regionally London has continued to see the strongest levels of house price growth, although that market is increasingly restricted to more affluent buyer groups who are having to spread their search further across the capital. As a result there has been a shift in the pattern of growth in the capital, towards those less expensive boroughs which have seen less price growth over the past decade and remain more affordable.

In particular, the top end of the London market has been held back by the stamp duty changes introduced in the 2014 Autumn Statement which have further increased transaction costs for properties over £1m. Given the price growth which preceded these changes, that market is currently left looking both fully priced and fully taxed which suggests a further delay in the return to trend rates of house price growth.

Costs of borrowing

The outlook for the mainstream market is much more dependent on what happens to costs of borrowing. Current indications are that rate rises are still a little way off, which gives more short term capacity for price growth and increases the prospects of a ripple effect gaining a foothold. However, the stress testing of affordability for mortgaged owner occupiers is likely to prevent a debt driven housing market boom.

Over the medium term, rate rises are likely to put a squeeze on affordability particularly in the capital, making house price growth dependent on earnings and the pace of economic growth both at a national and regional level. This indicates the strongest potential for house price growth in London's hinterland, feeding further north later in the cycle (see Figure 2).

Private renting

These two issues of mortgage regulation and interest rates will impact on people's ability to access the housing market. Despite a series of government policies focused on boosting housebuilding and homeownership, we expect levels of demand for private rented sector accommodation to continue to rise.

Recent stamp duty changes and the restriction in the tax relief given to mortgaged buy to let investors are likely to limit the ability of this group to extend their portfolios to meet this demand. This may add to the upward pressure on private rents. It is also likely to result in a shift in the focus of this type of investor towards higher yielding sectors of the market, though not those which are heavily dependent on welfare payments.

Industry issues

All of the indications are that the house building sector will continue to benefit from government support, though at this stage it is unclear as to how policies such as Starter Homes will work in practice and whether they will result in a step change in housing delivery.

Similarly many questions remain unanswered as to how Housing Associations will be affected by a raft of new policies, most notably the proposed cuts in social rents.

FIGURE 2

Residential forecasts

 
Figure 2

Source: Savills Research

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Key Contacts

Lucian Cook

Lucian Cook

Director
Residential Research

Savills Margaret Street

+44 (0) 20 7016 3837