a cushman & wakefield insight publication residential ...the pcl lettings market has not faired...
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RESIDENTIAL MARKET
COMMENTARYApril 2017
A Cushman & Wakefield Insight Publication
1Cushman & Wakefield | Residential
ECONOMIC GROWTH
In 2016 UK economic growth was 1.8%, in line with the
1.7% recorded for the Eurozone; other core economies
like France and Germany grew by 1.1% and 1.8%
respectively. Oxford Economics expects GDP to rise to
1.8% this year and 1.3% in 2018. However growth is set
to slow through this year as higher inflation puts a
squeeze on household spending power and weakens
consumer spending growth. Risks to growth are weighted
to the downside due to Brexit, plans for a second Scottish
independence referendum, further austerity and doubts
on UK productivity performance. Moreover a European
downturn and slowdown in China are key global
downside risks; on the other side, the Trump effect could
have a mildly positive impact for the UK
Macro Economic Overview
ECONOMIC INDICATORS* 2015 20162017
(f)
2018
(f)
2019
(f)
GDP growth 2.2 1.8 1.8 1.3 1.6
Consumer spending 2.5 3.1 1.6 0.5 1.0
Industrial production 1.2 1.2 1.6 0.3 0.6
Fixed Investment 3.4 0.5 1.0 2.4 3.4
Unemployment rate ILO (%) 5.4 4.9 5.0 5.1 5.1
CPI Inflation 0.1 0.6 2.5 2.1 1.8
Exchange Rate (US$ per £) 1.5 1.4 1.3 1.2 1.2
Exchange Rate (Euro per £) 1.4 1.2 1.2 1.2 1.2
Short-Term Interest Rates (%) 0.6 0.5 0.3 0.3 0.4
Long-Term Interest Rates (%) 1.9 1.3 1.4 1.8 2.1
EMPLOYMENT, WAGES AND CONSUMPTION
Since the peak in 2008 UK unemployment rate decreased to 4.9% at the end of 2016 and it is expected at 5% by the end
of this year. The current jobless level is low on historical levels, however there are concerns about wage growth. Market
data shows that average earnings growth is not picking up like CPI inflation in the first months of this year, as a result real
wage growth is weak. Oxford Economics forecasts that wages will increase by 3.1% this year (nominal terms), up from
2.7% per annum over 2010-2016 period; therefore wage growth should remain into positive territory this year. Higher CPI
inflation, weak wage growth and government’s welfare reforms are putting consumer spending under pressure. Growth is
forecasted to slow from 3.1% last year to 1.6% this year and 0.5% next year.
INFLATION AND INTEREST RATES
UK annual CPI inflation has remained low over the last couple of years, dragged down by falling prices of oil, food and
energy. However, CPI has already started to accelerate from the 0.1% recorded at the end of 2015. Oxford Economics
expect this measure of inflation to peak at around 2.5% by the end of the year. It is still uncertain when the bank rate will
start to rise, with a widely expected rise last year not materialising, and rates actually being cut further in response to the
referendum result. Oxford Economics forecast the BoE base rate to rise to around 1.5% by 2021.
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
GDP GROWTH (annual %) INFLATION (annual %)
Market Outlook
GDP Growth is set to slow down and bottom in 2018
Inflation Prices are already increasing
Interest rate On hold until 2019
Employment Unemployment rate stable but weak wage growth
Source: Oxford Economics
2Cushman & Wakefield | Residential
National Market
OVERVIEW
The UK House Price Index for February recorded a monthly increase of 0.6%, with the annual rate of inflation now
standing at 5.8%. The Nationwide House Price Index, March release also shows nationwide growth softening, with
annual house prices increasing 3.5% in the 12 months to March (down from 4.5% in February) and down marginally (-
0.3%) for the month, although this may prove to be a temporary trend.
The February RICS market survey showed little change from previous months, with both demand and supply levels
remaining subdued with the South West recording the strongest levels of new buyer enquiries, while the East Midlands
was the weakest. The report also recorded a distinctive fall in new landlord registrations, combined with strong tenant
demand. We would therefor expect this to start to feed in to rental rises in the early part of summer.
Affordability constraints for borrowing owner-occupiers and reduced demand from buy-to-let investors, due to increased
taxation on transactional and hold costs, should ensure that national house price inflation in the near-term will run at a
relatively modest rate (by recent standards) of between 0-3%. Wage/household income growth will therefore become the
main driver of any advance in the near-term. Despite a reduced level of demand, we believe the chances of any form of
significant market downturn remain slim as levels of stock for sale remain low and the post-referendum economy
performs above general expectations.
While rates of house price growth among the regions begin to converge somewhat, significant regional splits remain
evident when analysing where current prices are in relation to their 2007/2008 pre-downturn peaks. While prices in
South East and East England now sit at 30% above peak 07/08 levels, prices in the North East are still 10% below their
previous levels. The obvious outlier in these figures in London, where current values are over 60% above their late 2007
levels.
£100,000
£120,000
£140,000
£160,000
£180,000
£200,000
£220,000
£240,000
Dec-0
7
Mar-
08
Ju
n-0
8
Se
p-0
8
Dec-0
8
Mar-
09
Ju
n-0
9
Se
p-0
9
Dec-0
9
Mar-
10
Ju
n-1
0
Se
p-1
0
Dec-1
0
Mar-
11
Ju
n-1
1
Se
p-1
1
Dec-1
1
Mar-
12
Ju
n-1
2
Se
p-1
2
Dec-1
2
Mar-
13
Ju
n-1
3
Se
p-1
3
Dec-1
3
Mar-
14
Ju
n-1
4
Se
p-1
4
Dec-1
4
Mar-
15
Ju
n-1
5
Se
p-1
5
Dec-1
5
Mar-
16
Ju
n-1
6
Se
p-1
6
Dec-1
6
Mar-
17
UK House Price Index Nationwide House Price Index
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
London South East East ofEngland
SouthWest
EastMidlands
WestMidlands
Scotland Yorkshire& The
Humber
NorthWest
Wales North East
Current Prices in Relation to 2007/2008 Peak
Sources: UK House Price Index / Nationwide House Price Index / RICS UK Residential Market Survey
3Cushman & Wakefield | Residential
National Market (cont)
NEW HOME CONSTRUCTION
The volume of new home construction starts continued its upward trend throughout 2016 with over 40,000 starts in the final
quarter of the year. Whilst falling some way short of the commonly quoted 60,000+ homes needed per quarter, this Q-on-Q
growth is certainly welcome. Within the data there are some contrasting stories though, with London new home starts
falling 24% in the second half of 2016, when compared with H1 2016.
The release of the DCLG’s 2017 Q1 figures will be eagerly awaited as this will provide a clearer indication of the major
housebuilders objectives post EU referendum. Whilst we feel that quarterly starts exceeding 50,000 are still some way off,
the underpinning effect from the popular Help to Buy Equity Loan scheme (HTBEL) should ensure that healthy levels of
construction starts remain. However, this strong support brings with it a certain element of risk. While current cross-party
support for the scheme should ensure its continued existence in the near-to-medium term, it is worth noting that some lower
value new home markets remain significantly over-reliant on the demand created by the scheme. We would therefore
attribute an element of risk to these areas due to the possible, albeit unlikely, sudden withdrawal of the scheme.
TRANSACTIONS
While a prolonged period of price stability has the possibility to trigger a degree of fluidity from owner-occupiers who where
previously hesitant about making major decisions, we do not anticipate this potential increase in activity to be added to by a
widely predicted small-scale investor sell-off. The phased-in reduction in mortgage interest tax relief and a perceived anti-
landlord government stance had led some to forecast a wide-scale sell-off from this genre of investor. However limited
returns in alternative investments and a generally low level of debt against property in this sector would lead us to believe
that existing landlords will retain their residential property investments. In the longer term, we expect natural levels of
fluidity to return to the market, but do not foresee a return to pre-07/08 transaction levels, as longer hold periods become
the norm and the practice of ‘flipping’ remains largely unviable due to flattening rates of house price inflation. We would
therefore expect a new ‘norm’ to be 1.3-1.4m transactions per annum.
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17
UK Sales Transactions
England Scotland Wales Northern Ireland
Post-downturn average (85,536)
Pre-downturn average (138,037)
0
10,000
20,000
30,000
40,000
50,000
60,000
Q1
20
00
Q2
20
00
Q3
20
00
Q4
20
00
Q1
20
01
Q2
20
01
Q3
20
01
Q4
20
01
Q1
20
02
Q2
20
02
Q3
20
02
Q4
20
02
Q1
20
03
Q2
20
03
Q3
20
03
Q4
20
03
Q1
20
04
Q2
20
04
Q3
20
04
Q4
20
04
Q1
20
05
Q2
20
05
Q3
20
05
Q4
20
05
Q1
20
06
Q2
20
06
Q3
20
06
Q4
20
06
Q1
20
07
Q2
20
07
Q3
20
07
Q4
20
07
Q1
20
08
Q2
20
08
Q3
20
08
Q4
20
08
Q1
20
09
Q2
20
09
Q3
20
09
Q4
20
09
Q1
20
10
Q2
20
10
Q3
20
10
Q4
20
10
Q1
20
11
Q2
20
11
Q3
20
11
Q4
20
11
Q1
20
12
Q2
20
12
Q3
20
12
Q4
20
12
Q1
20
13
Q2
20
13
Q3
20
13
Q4
20
13
Q1
20
14
Q2
20
14
Q3
20
14
Q4
20
14
Q1
20
15
Q2
20
15
Q3
20
15
Q4
20
15
Q1
20
16
Q2
20
16
Q3
20
16
Q4
20
16
New Home Starts
Private Enterprise Housing Associations Local Authorities
Sources: UK House Price Index / Department for Communities and Local Government
4Cushman & Wakefield | Residential
PRIME CENTRAL LONDON (PCL)
After an unexpectedly strong final quarter of 2016, the Prime
Central London market took a downward turn at the start of the
year. However, March data may indicate an upturn, with prices,
transaction volumes and the sold-to-asking percentage increasing
from the preceding month. It is worth noting that the monthly
increase in sales activity was from a very low February figure,
and that sales volumes for March were significantly down when
viewed on a year-on-year basis. Average achieved £ per square
foot values in PCL currently stand at £1,725.
The PCL lettings market has not faired as well in 2017, with
prices falling in the first three months. Achieved rents were down
0.5% on February, and 0.9% on a year previous. Falling monthly
achieved rents-to-asking price figures would suggest this trend
will not reverse in the near future.
Prime London Markets
Source: Cushman & Wakefield Research / LonRes
Area definitions for report: PCL = W1H, W1U, W1G, W1B, W1S, W1C, W1K, W1J, SW1A, SW1Y, SW1P, SW1H, SW1E, SW1W, SW1X, SW7, SW3, W8. OPL = NW3, NW8, W2, W9, W11, W14, SW6, SW10.
OUTER PRIME LONDON (OPL)
It is a similar story in the Outer Prime London (OPL) market,
where sales transactions in March more than doubled the
numbers from February. Again though, this masked the fact that
year-on-year there has been a significant reduction in activity.
From a capital values perspective, March witnessed an upward
turn, although year-on-year values are down 2.7% due to a weak
2016.
In the OPL lettings market prices have fallen in three consecutive
months, with achieved rents down 0.6% month-on-month, and
0.9% year-on-year. However, our key indicators suggest this
trend may reverse as we head into Spring with the achieved rent-
to-asking price percentage strengthening, due mainly to a lack of
new stock coming to the market.
IndicatorM-on-M
(Feb-Mar)
Y-on-Y (Mar-
Mar)
Sales
Transactions+32% -37%
Capital Values +0.15% +0.54%
Sold-to-Asking
%+24bps (94.65%) -60bps
Rental Prices -0.46% -0.93%
Rents-to-
Asking %-68bps (94.96%) -128bps
IndicatorM-on-M
(Feb-Mar)
Y-on-Y (Mar-
Mar)
Sales
Transactions+52% -42%
Capital Values +0.43% -2.68%
Sold-to-Asking
%+14bps (95.71%) -63bps
Rental Prices -0.55% -0.92%
Rents-to-
Asking %+45bps (96.93%) +103bps
92.00
94.00
96.00
98.00
100.00
102.00
104.00
106.00
108.00
Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17
Cushman & Wakefield 12 Month Prime London Markets Index(Mar 2016 = 100.00)
PCL Capital Values PCL Rents OPL Capital Values OPL Rents
5Cushman & Wakefield | Residential
OVERVIEW
The introduction of tighter mortgage
affordability tests in 2014, a greatly
reduced number of high loan-to-income
mortgages, and a higher proportion of
fixed rate mortgages, go some way to
ensuring that the market is now far
more resilient to sudden shocks, such
as an unexpected interest rate rise
than previously. Nearly half of all
borrowers are now on fixed-rate
mortgages, with just under 90% of new
mortgages fixed. This should ensure
that any increase will be absorbed into
the market over a period of years.
BUY-TO-LET LENDING
As a result of the recent increased taxation of buy-to-let landlords, the Council
of Mortgage Lenders (CML) recently released data is predicting a relatively
sharp downturn in investor activity (see below).
Mortgage Market
AFFORDABILITY
The Nationwide measure first time buyer affordability highlights that most regions of the UK have now either surpassed or
are approaching previous peak levels in terms of price to earnings ratios (see figure A), but in terms of actual affordability,
mortgage payments as a percentage to mean take home pay are still some way behind in all regions but London (figure B).
This indicates, the market still has the ability to absorb rises in interest rates from an affordability perspective.
0.0
2.0
4.0
6.0
8.0
10.0
12.0
London OuterMet
OuterSE
SouthWest
EastAnglia
UK WestMids
EastMids
Wales NIreland
NorthWest
Yorks &H
North Scotland
Figure A - 1st Time Buyer House Price-to-Earning Ratios
Q4 2016 2007/2008 Peak
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
London OuterMet
OuterSE
SouthWest
EastAnglia
UK WestMids
EastMids
Wales NIreland
NorthWest
Yorks &H
North Scotland
Figure B - Mortgage payments as a % of mean take home pay
Q4 2016 2007/2008 Peak
Sources: Nationwide House Price Index / Council of Mortgage Lenders
0
100
200
300
400
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 (f) 2018 (f)
Buy-To-Let Activity Levels
House purchase RemortgageSource: CML Economics
6Cushman & Wakefield | Residential
Author
Lee Layton
Associate Director
Residential - Research
020 3296 4574
Contacts
Candice Matthews
International Partner
Head of Residential
020 3296 3988
Mike Bickerton
Partner
Residential – New Homes
020 3296 3837
Jack Simmons
Partner
Residential - Investment
020 3296 4991
Fergus Jack
Partner
Residential - Investment
020 3296 4494
Nick Jacks
Partner
Valuation & Advisory
020 7152 5264
Jonathan Godfrey
Partner
Valuation & Advisory
020 7152 5760
Andrew Palmer
Partner
Residential - Land
020 3296 4033
Daniel McDonagh
Partner
Residential - Land
020 3296 4674
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Disclaimer
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© Cushman & Wakefield April 2017
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