First Time Buyers give light relief to a paralysed housing market: October 2019
01/11/2019
The most prominent aspect of this month's housing market figures is the continuing flat-lining sales volume levels, particularly in London. Against this, there is minor relief regarding increased first time buyer numbers and some stakeholders will welcome the new peak in average house prices in England and Wales.
However would you rather sell 5,737 houses at £471,557 or 11,980 houses at £431,644? Because this is the cold reality of what has happened to London's housing market since the Brexit referendum - and we examine this state of affairs below.
To mention Brexit uncertainty as a retardant factor in people's decisions whether to purchase or not is to state the obvious. However it isn't the whole picture as, to the contrary, fears of what the future might hold for housing post-Brexit might well be encouraging some prospective buyers to act now, particularly those who've not bought before.
Alongside our normal consideration of housing price levels and sales volumes in England & Wales and London according to the most recently available monthly figures, we:
- investigate sales volumes (and prices) before and since Brexit for the month of July over the last four years;
- drill down into other reasons why more first time buyers are appearing; and
- report on how inheritance tax reliefs might be clogging up the market.
We also, as usual, analyse the National Association of Estate Agent's (NAEA) most recently monthly housing market report.
[All statistics which follow are the most recently available figures from the Land Registry and the Bank of England unless otherwise stated.]
England and Wales – new peak in average prices
Prices hit their highest levels ever in England & Wales for the Land Registry's latest recorded month (September). The £246,553 price tag for an average property exceeded the previous peak – £244,379, recorded for the previous month (August) – by 0.9% and the figure was 1.4% up year-on-year.
Volumes, however, at 63,559 for the latest recorded month (July) were not only down 2.3% month-on-month but 17.5% down year-on-year. In fact there's no obvious causal pattern between volume levels and prices in the last 18 months.
Ceteris paribus, one might expect prices to rise alongside volume levels – an active market is a popular one – however a graph plot shows that while prices overall have gradually risen over the period, volumes have oscillated: they peaked in June 2017 (89,018), however average prices that month (£233,390) were just over 3% below those that accompanied the most recent month's volume figures (63,559 and £242,196).
As we've frequently remarked, prices appear to be very 'sticky downwards' regardless of volume levels.
London – woeful volume levels continue…
Average prices for September in the capital, at £472,753, fell back month-on-month by 1.3% and by 0.8% year-on-year. This not only makes August's average price, £478,989, appear to be a mini-blip, but is also more in keeping with the fall in volume levels, to 5,737 (for July), from 6,056, a 5.6% month-on-month fall and a 31.5% fall year-on-year.
Therefore the rather dire – but regular – narrative of base-scraping volumes in the capital continues: this was the third worst month recorded since May 2009, which was in the immediate aftermath of the last property price crash.
Inflation, Wages and Purchasing Power
Inflation, as measured by the Consumer Price Index (CPI), rose fractionally month-on-month, by 0.09%, and 1.8% year-on-year, making the average monthly rise over the last four months just 0.14%.
Average weekly earnings rose by £1, to £524, an equivalent of £28,184 annually. This represented a marginal 0.2% month-on-month rise and therefore a slight real wage increase. This was higher than the estimate for a year earlier (£462 per week), but £1 (0.3%) lower than the pre-recession peak of £473 per week for April 2008.
The equivalent figures for total pay in real terms are £502 per week in August 2019 and £525 in February 2008, a 4.4% difference.
Clearly the average UK worker is still waiting for that elusive pay increase that so many politicians in recent times have said they deserve…
Both Mortgage and Remortgage Approvals Rise
Mortgage approvals rose by 0.4% month-on-month and 0.6% year-on-year to 65,919 for September, which was the most recently-available month's figures from the Bank of England, and remortgages also rose 1.2% month-on-month and 0.3% year-on-year, to 49,268.
The rise in remortgage approvals is most likely a result of people opting to stay put and invest in their current dwellings amid Brexit uncertainty, although the rise in mortgage approvals is less easy to explain. It may be that, despite volume levels for home purchases falling both in the capital and England and Wales, a reasonable number of first time buyers – and non-cash buyers in general – have decided that they can no longer put off their purchases. This is despite the attendant Brexit uncertainty as well as, for England and Wales, an overall average price rise for the last two months.
Has Brexit caused the slump in Sales Volumes?
Although it's arguably over-simplistic to say that just one factor is entirely responsible for the decline in housing sales volumes in a sector as complex as the housing market, it might be illuminating nonetheless to consider sales volume figures and prices for July spanning from the year before the EU referendum of June 2016 up to the present date.
The advantage of considering figures for just one month every year rather than all 12 is that the housing market is well-known to be cyclical in nature, with fairly predictable rises and falls: picking just one month cancels out much of the 'noise' of the yearly cycle. In keeping with how we normally address the sector, we firstly examine the figures for England and Wales, then the figures for London.
Sales Volumes and Prices for England & Wales for July 2015 - 2019
The clear trend for prices is upwards (albeit with seasonal and monthly variations which weren't considered) with an overall rise of just under 16% over the 4-year period.
However for volumes, the story seems equally clear, albeit in the opposite direction and, percentage-wise, is of double the magnitude with an overall decline of just under 33%.
All other things being held equal ('ceteris paribus'), one might expect housing market stakeholders to drop prices as volumes tail off in order to encourage sales however this didn't happen and sales volumes continued to fall. If prices had risen by a magnitude greater than the drop in sales volumes, one could reason that the market was still increasing in profitability, but this isn't the case either.
What's also notable is that volumes in our series were at their highest in the year before the referendum.
We cannot rule out the existence of other contributory factors, but we equally cannot downplay the gravity of the referendum - and its result and aftermath - on people's perception and regarding their home buying choices.
Sales Volumes and Prices for London for July 2015 - 2019
The trend for prices in the capital is more nuanced, with a rise to a peak in 2018 then a fall off in 2019 to an average price a little below 2016's average. The overall difference, comparing 2019 to 2015 is a little over 9%.
The sales volume picture is not only clearly a downward trend but it isn't a regular 'slope': the fall-off from 2015 to the month just after the 2016 referendum is the most marked at nearly 27%, contributing to an overall decline of a little over 52% for the period.
Many commentators have posited that London's market is a bellwether for the rest of the country: it's always a more expensive market but it's also more responsive. The decline slowed down in magnitude for the next two years but between 2018 and 2019, which is when prices also fell (by nearly 4%), the volume fall was just under 31% - and if anything, most experts would say that Brexit uncertainty in markets in general has been most marked during this last year. This is because the Article 50 time period ran down to its conclusion while Westminster still hadn't/hasn't set out the clear direction of travel.
It's notable also that although the price fall is more in line with conventional economics, it hasn't been enough to halt the precipitous fall in sales volumes.
So overall it's not controversial to say that the lack of a clear direction on Brexit post-referendum is a clear factor in the dire sales volumes housing practitioners have been facing...and may well continue to face...
Falling mortgage rates encourage First Time Buyer Numbers
If increasing numbers of first time buyers make up a significant part of increased mortgage approvals for the month, it's likely that falling mortgage rates are a significant causal factor in encouraging this group to apply for home loans.
The continuing property sales volume slump has caused mortgage rates to fall by around 10% on average overall, according to figures from UK finance, the banking industry trade body, in order to encourage applications. This has translated into, for example, the average five-year fixed-rate mortgage with a small deposit falling from 4% a year ago to 3.6% today according to one prominent financial analyst quoted in media reports and, over the same period, the average two-year rate dropping from 3.63% to 3.27%.
First time buyers, who typically buy with smaller deposits, have been one of the primary beneficiaries of the lower rates.
There were 35,010 new first-time buyer mortgages completed in August 2019, 0.7pc higher than for August 2018, according to UK Finance.
Are Inheritance Tax Rules Jamming the Housing Market?
One media report posited that current inheritance tax rules are clogging up the property market by stopping older people from downsizing because they lack knowledge of the specific reliefs in place to prevent this state of affairs.
The report suggested that these reliefs which allow property owners to pass on more of their wealth when they die are having the unintended effect of encouraging elderly people to hold on to larger, more valuable homes that may not suit their needs so they can benefit fully from the tax breaks.
Family Home Allowance
The family home allowance, otherwise known as the residence nil-rate band permits home owners to pass on £150,000 of property wealth tax free, on top of the existing £325,000 standard inheritance tax allowance, if leaving a home to a direct descendant. In 2020 this increases to £175,000 and means spouses and civil partners, who can share their allowances, will be able to pass on up to £1m free of tax.
However some people, looking to pass on as much wealth as possible, have decided to not sell up and move into smaller homes – because these are less valuable – or into care as a result. This behaviour has the knock-on effect of exacerbating the shortage of suitable properties for younger, growing families and the lack of supply caused is a factor in driving up property prices and/or keeping them at higher levels, which filters down through the entire market, eventually pricing many first time buyers out of the market.
But a 'downsizing addition' in the rules allows someone who decides to move into a smaller property – and who therefore might, depending on the value of the smaller dwelling get less benefit from the property aspect of the relief – to be able to claim up to an extra £100,000 from remaining other assets in an estate not already covered by the central £325,000 tax-free allowance.
Some commentators have not only attacked the reliefs described as fiendishly complicated and have suggested that the solution might best lie in cancelling the downsizing provision and simply allowing anyone who has previously owned and lived in a home to be able to claim the entire family home allowance.
The above is highly likely to be a significant causal factor in the continuing depressed sales volumes affecting our entire housing market.
NAEA – First Time Buyers Hit Seven-Month High
The National Association of Estate Agents led with the number of first time buyers hitting a seven-month high in its most recent housing market report, for September, which we surmised was a large factor in the increase in mortgage approvals discussed earlier.
Although the NAEA member branches reported sales to this cohort as being the highest since February this year – it represented 30% of all sales coupled with a year-on-year increase of 8% - overall the number of sales agreed fell for the first time in four months. Additionally the number of prospective buyers fell by 11% and the supply of available housing decreased.
The NAEA's report surmised that the increase in first time buyer numbers partly resulted from low or no stamp duty on lower-priced properties while also suggesting that these buyers may have acted out of fear that the post-Brexit market might be an unfavourable one following a Brexit deal.
The report additionally forecasted cautiously that first time buyer sales would continue to rise, however much clearly will depend on the resilience of the economy. If we have a recession post-Brexit, the likelihood of a squeeze on wages and employment numbers greatly increases and the personnel that make up this group are likely to be hit harder than most by these effects, something which would have the knock-on effect of corroding their home buying ability.
You can't buy a house if you don't have a job…
Finally, the NAEA once again reported that the vast majority of properties – this month it was 83% – sold for less than asking price.
Brexit or no Brexit, this uncomfortable fact, which continues to defy the classic rules of supply and demand, persists and cries out to be addressed…
Andrew Boast, co-founder of SAM Conveyancing, said:
"The peculiar nature of England and Wales' housing market might make the new peak in average house prices less than remarkable as news and 'Brexit uncertainty' has more or less become a mantra used to explain retardant effects in many markets, including housing. But Brexit or no Brexit, there's no glossing over the persistent eyesore of flat-lining volume levels and it's only this factor which makes the new peak in prices more curious."
"Experts have provided some evidence that one factor in the sales volume slump is likely to result from our complicated system of tax and reliefs, in this case the family home allowance relief from inheritance tax. And it's a persuasive argument particularly because it's easy to see how it feeds down from the top to the very bottom of the housing ladder. The good news is that there is a possible - and relatively simple - solution to this particular problem, however it's unlikely to be the only reason for the stagnation."
"It's always refreshing to report a relative and absolute increase in first time buyer numbers. Additionally the fundamentals this month strongly suggest that the mortgage market at least is correctly responding to prevailing conditions: all things being held equal, poor housing sales volumes should encourage lenders to drop rates to encourage mortgage applications. This appears to be the case, with first time buyers in particular proving to be the winners."
"We hope at this point that the General Election will result in a clearly defined direction of travel and one where housing market practitioners can plan their strategies with increasing certainty. And if the future Government can pay proper attention to the housing market, with intelligent longer term policies addressing both supply and demand issues, we can hardly ask for more."
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