The last few months have certainly been a turbulent time for the property market. In March, the residential sector saw record house price growth, coupled with a big rise in property sales as investors rushed to beat the introduction of higher Stamp Duty. Those who would normally have bought in April generally bought early and, predictably, the following month’s figures looked far more depressed.
Prices fell by 0.8% in April and transaction volumes were well down, prompting some to wonder whether the Chancellor’s efforts to put the brakes on the buy-to-let sector were working. However, the market was quick to rebound and, according to the most recent house price index from Halifax, average UK values rose by 0.6% in May. This was well ahead of many industry predictions, suggesting – once again – that what really determines prices is the classic interplay of supply and demand.
Commenting on the latest figures, Martin Ellis, housing economist at the Halifax said: “Low interest rates, increasing employment and rising real earnings continue to support housing demand. The strength of demand, combined with very low supply, is causing house prices to rise at a brisk pace in quarterly and annual terms.”
That demand is high should come as no surprise to anyone, but the “very low supply” to which Ellis refers is worthy of further examination. For years now, commentators have been pointing to the construction industry’s failure to build enough homes to meet demand, but in more recent times, there had been signs that house-building was on the rise. It was only in February that the government announced that new home-building across England had reached its highest level since 2008. Official figures showed that 139,680 new homes were started in 2015/2016, which represents a rise of 12% against the previous year.
However, many critics argued that even this improved rate was 27% below the peak rate seen in 2007, and that it therefore fell far short of what was actually demanded by the market.
In any case, the question proved to be moot. Since the start of the year, the industry has seemed unable to sustain its pace. At the end of May, the Department of Communities and Local Government (DCLG) published new figures, which found that house-building rates had slowed considerably in the first quarter of the year. Between January and the end of March, 32,950 homes were completed. This represents a fall of 9% compared to the previous quarter and 3% when compared to the previous year. The industry seems confident of growth this year but few expect it to make a substantial difference to the overall market balance.
The government, of course, has set a target of building a million new homes by 2020, although it remains to be seen how close it gets to achieving it. What seems beyond doubt for now is that there is still a marked under-supply, and with demand being so high, investors should be able to count on steady medium to long term growth.
In the more immediate term, investors can probably expect another short-lived market slowdown this month. The spectre of Brexit will undoubtedly be prompting many landlords to postpone any major decisions until the results of the referendum are known. It’s possible that we could therefore see a reverse of the ‘Stamp Duty effect’ – in other words, a marked reduction in transactions before the announcement, followed by a relatively rapid release of pent-up demand.
That said, this is a rather more complex issue. The prospect of leaving the EU has been widely discussed and there seems no doubt that a ‘Leave’ vote would give rise to further market uncertainty, at least for a period. In an article published on 7th June, Property Investor Today wrote that: “a growing number of property investors are adding clauses into contracts giving buyers the right to walk away from commercial property deals in Britain if the country votes to leave the European Union later this month.”
It’s probably fair to say that many foreign investors regard a UK departure from the EU as potentially damaging to their financial security. Predictability is generally a favoured characteristic amongst investors and leaving the Union would undoubtedly entail a great deal of change. To oversimplify the point, overseas investors appear to be taking the view that a Remain vote would see Britain delivering ‘business as usual’, whereas a departure could mean unwanted volatility and risk.
Nevertheless, regardless of what the nation decides on June 23rd, there is no escaping the fundamentals of supply and demand. There are still far more potential buyers in the UK than there are residential properties to buy. While the economy maintains its slow recovery, while employment remains strong and while average earnings continue to climb, UK residential property should remain a very secure investment.