6th May 2014
UK house prices are rising strongly again despite very weak growth in earnings. But while the market is indicative of a recovering economy, questions are being asked over its sustainability. In a special two-part report, Schroders European economist Azad Zangana, looks at how the beast that is the UK housing market, can be tamed…
Martians may be forgiven for not noticing the boom in the UK housing market over the past year, otherwise, the nation’s favourite talking point has returned to dominate the business news agenda. The financial press are now filled with various indicators returning to pre-crisis levels, and of course, the sharp rise in prices being recorded.
Not only has much excitement been generated in the press but also concern over the risk of yet another housing bubble being created. The government’s stimulus measures announced in last year’s budget have primarily helped boost confidence in the market but are also helping a minority for new buyers to access higher valued loans relative to the price of properties.
Those concerns have prompted the Bank of England to exclude mortgage financing from the Funding for Lending Scheme at the end of last year but may also lead its new Financial Policy Committee (FPC), which is tasked with guarding the UK’s financial stability, to take action to tame the housing market.
Boom times are back
According to the Halifax house price index, average UK house prices rose by 8.7% in the first quarter of this year – their fastest pace of annual growth since the third quarter of 2007. The recent boom in house prices is far from uniform across the UK. Unsurprisingly, London is leading the boom with prices up 15.7% compared to a year earlier. The worst performing region is Scotland with prices down by 1.4% compared to a year earlier. While the latter is pre-occupied with the possibility of gaining independence from the union in a vote to be held in September, the geographic and economic capital is firing on all cylinders, which is being reflected by the price of property.
The London housing market has not only traditionally enjoyed huge migration from the rest of the country as the most talented seek the most rewarding opportunities but its rich cultural offerings have also attracted many foreign buyers.
Some of the wealthier foreign buyers clearly take advantage of the UK’s lax foreign ownership laws to use London property as a store of wealth – particularly when troubles flare up at home. Indeed, according to a report by estate agent Savills, foreign investors have bought about 70% of newly built properties across central London in 2013, while another estate agent, Knight Frank, says that 30% of luxury London homes worth £1m or more were bought by foreigners.
Such reports prompted Chancellor George Osborne to announce plans to introduce a capital gains tax for non-residents from April 2015 (possibly at 28% matching the rate residents pay). Implementation of such a tax will be difficult but the Treasury forecasts the measure to raise £15bn in revenues in tax year 2016-17, rising to £70bn in 2018-19.
The plans would bring the UK in line with other key investor markets, such as New York and Paris, where similar taxes can reach 35-50%. Osborne also introduced a punitive 15% rate of stamp duty on company-owned properties worth over £2m. The shell-company ownership was commonly used to avoid certain taxes, but also to protect buyers’ anonymity.
By tightening these tax rules the Chancellor is seeking to close obvious loopholes, but the strategy is also in response to fears that foreign investors could be fuelling the next property bubble. However in our view, the Chancellor should pay more attention at the woeful lack of supply of new homes.
It’s a lack of supply stupid
Given a growing population, demand for residential property is rising. However, with supply woefully inadequate, house prices naturally must rise in order for the market to clear.
The lack of supply of residential property is a relatively recent phenomenon. During most of the period between 1950 and the late 1990’s, the pace of construction kept up with the growth in the UK’s population, and indeed, even outpaced it for long periods.
Supply was not an issue thanks to a combination of private supply, along with government assisted ‘local authorities’ supply, and supply provided by housing associations (privately funded non-profit organisations). The range of supply generally satisfied the population’s income spectrum, until supply started to ease during the 1970’s. With the government’s finances under pressure, local authorities began to scale back new investment and to sell their stock of property to their tenants. This was formalised with the introduction of ‘Right to Buy’ under the Housing Act (1980) which dramatically accelerated the transfer of publically owned property to the private sector.
The creation of new dwellings from local authorities largely ended in the mid-1990’s and until the financial crisis, new supply had averaged a steady 193k homes per annum, while the population grew by 240k per annum. Since the start of the financial crisis (2008), population growth has averaged 451k per annum, while housing supply average a mere 153k – the lowest period since official records began in 1952.
The fall in the supply of new homes compared to the surge in the population is particularly acute in London. Examining the number of people per residential property (stock), we find that most regions in the UK have experienced a rise in the density ratio.
London has seen the number of people per existing home rise from 2.35 in 2004 to 2.48 in 2013. In the last three years alone, the stock of residential homes has risen by just 68k properties, while the population has grown by a huge 381k people – 5.6 times faster than the availability of property.
In order to stabilise the demand supply dynamics, we believe that the population cannot grow by more than 2.5 times the supply of homes. Therefore, the annual supply of London property needs to more than double just to stop the imbalance worsening…