Housing Prospects The Prospects Service January 2015 The

Housing Prospects The Prospects Service January 2015 The Prospects Service © Centre for Economics and Business Research ltd

Housing Prospects January 2015 Contents Executive summary 3 UK house prices Rents 4 5 Leading indicators 6 Home-buying affordability 10 Key interest rates 11 Tax reform 12 Housing transactions 14 London house price trends 15 Regional house price summary 17 Housing supply 18 Contact details 19 The Prospects Service © Centre for Economics and Business Research, 2014 This report is produced by the Centre for Economics and Business Research (Cebr) as part of our macroeconomic trends, analysis and forecasting advisory membership service, The Prospects Service. This report and all associated material shall remain the property of Cebr and are only made available to bone fide employees of organisations with a current and fully paid-up membership of The Prospects Service. Such materials may not be disclosed or transmitted to individuals or organisations outside the member organisation without prior written permission from a director of Cebr is not licensed in the conduct of investment business as defined in the Financial Services and Markets Act 2000. Any client considering a specific investment should consult their own broker or other investment adviser. Any views on investments expressed by Cebr, or on behalf of Cebr, are intended to be generic only. Cebr accepts no liability for any specific investment decision which must be at the investor's own risk. Whilst every effort has been made to ensure the accuracy of the material in this report, neither the authors nor Cebr will be liable for any loss or damages incurred through the use of this report or associated materials. 2

Housing Prospects January 2015 Executive Summary • House prices to grow by 8. 8% in 2014 but decline by 0. 6% in 2015. In this latest edition of Housing Prospects we have made a minor upward revision to both our 2014 and 2015 expectations. We now expects UK house prices to have grown 8. 8% over 2014 and anticipate a 0. 6% decline in 2015. This is marginally up from our September forecasts of 7. 8% and -0. 8% for 2014 and 2015 respectively. • Reported price declines and falling new buyer enquiries clearly signal that the London housing market is slowing rapidly. Average house prices in the capital are expected to fall by 3. 4% in 2015. While strong house price growth in London has recently driven up average UK house price, in 2015 we expect the capital to witness a price drop greater than anywhere else in the country. Leading indicators such as falling new buyer enquiries and properties taking longer to sell already point to price declines. • London in particular will be impacted by a decline in foreign demand for property, consumer perception of a slowing housing market, tougher mortgage eligibility criteria, and election/mansion tax uncertainty. • Housebuilding in London will be faster than at any other time in the past few decades, placing further downward pressure on housing prices. The Prospects Service A series of domestic and global developments are likely to place downward pressure on London house prices. Foreign demand for property is expected to decline as London property prices are now above their pre-crisis peaks in US dollar and euro terms. Also, concerns over the mansion tax are partially tarnishing the country’s safe heaven status. Finally, slowing economic growth abroad, most notably in Russia, is likely to limit foreign purchases of prime London properties. In addition to some demand side weakness, an increase in housing supply is further expected to place downward pressure on prices in the medium term. Housebuilding in London over 2015 will likely be faster than at any other time in the past few decades. Much of the UK is expected to witness higher transaction numbers as a result of changes to the stamp duty system, which reduces tax payments for properties valued below £ 1. 1 million. Still, this is unlikely to entirely offset other factors weighing down on market conditions. Furthermore, the consumer confidence data Cebr pulls together with You. Gov show that households’ expectations of future house price growth are beginning to weaken signalling that consumers are becoming aware of cooling in the housing market. If this perception translates into an expectation that prices will decline it is likely that some buyers will choose to postpone purchases. © Centre for Economics and Business Research, 2015 3

House prices to fall back next year • Both our 2014 and 2015 house price growth forecasts have been revised up marginally from 7. 8% to 8. 8% and from -0. 8% to -0. 6% respectively. Housing Prospects January 2015 Annual percentage growth in UK-wide mix-adjusted nominal house prices 20% • The slight upward revision reflects changes to the stamp duty system which is expected to boost transactions in most parts of the country. Our 15% latest forecasts also assume that some form of mansion tax is implemented. This assumption is based on the fact that the current betting odds on a Labour or a Labour/Lib Dems government are the 10% shortest. 5% 0% • Although mortgages remain relatively affordable due to low interest rates, which are unlikely to rise -5% until at least the end of 2015, the deposits needed to obtain a mortgage in the first place have become a significant barrier to getting on the -10% property ladder. • Increased housing supply will constrain price growth in the outer years of our forecast horizon. The Prospects Service 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 • House price growth in 2015 is expected to be well below what it was in the year behind us. This is not only a result of decreased foreign demand tougher mortgage eligibility criteria, but also reflects a correction in the market following a period of very strong house price growth. © Centre for Economics and Business Research, 2015 Source: Office for National Statistics, Cebr analysis 4

Housing Prospects January 2015 Rental demand supported by tighter mortgage criteria and concerns about falling house prices • Tougher mortgage eligibility criteria and high deposit payments are expected to lead to increased demand for rental accommodation in the short-term, pushing up prices. Fears of future house price falls will also support rental demand in the short term. • Across the UK, rents are expected to increase by 2. 7% in 2015, up from growth of 2. 3% this year. • Rental price growth is thereafter expected to fall back, as house prices return to growth and mortgage approvals rise. We expect rents to increase at an average annual rate of 2% beyond 2016. Annual percentage growth in UK housing rents 4. 0% 3. 5% 3. 0% 2. 5% 2. 0% 1. 5% 1. 0% 0. 5% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 0. 0% Source: Office for National Statistics, Cebr analysis The Prospects Service © Centre for Economics and Business Research, 2015 5

Housing Prospects January 2015 London properties take longer to sell, signalling a pending price drop • The amount of time that a property spends on the market has been decreasing across England Wales for much of the postfinancial crisis period. However, the most recent data shows a halt to the downward trend. Even so time on the market remains low compared to the past few years. Time on the market • Time on the market has risen especially sharply in London for much of 2014, likely a result of the slowdown at the prime end of the market. • The rise in time on the market suggests that a marked slowdown in London house price growth is on the way, something which is reflected in our expectation that average house prices in London will decrease by 3. 4% over 2015. Source: Hometrack The Prospects Service © Centre for Economics and Business Research, 2015 6

Buyer enquiries continue to slip Housing Prospects January 2015 New buyer enquiries-last month-net balance • Surveys of chartered surveyors across the UK show that new buyer enquiries have declined for five consecutive months to November 2014. • London saw the sharpest month-on-month fall. A total of 7 out of the 12 regions and countries of the UK reported a decline in new buyer enquiries. • Uncertainty surrounding the outcome of May’s election is among the reasons for the slowdown. • Due to Christmas and New Years December and January usually witness lower enquiry volumes, suggesting that the downward trend is likely to continue at least in the short term. New buyer enquiries, by region, Nov 2014 -last month-net balance Source: RICS survey of chartered surveyors The Prospects Service © Centre for Economics and Business Research, 2015 7

Housing Prospects January 2015 Demand may weaken as consumers anticipate further price falls Consumers’ perceptions of home value over next 12 months index 180 • The consumer confidence data Cebr pulls together with You. Gov show that households’ 160 expectations of future house price growth began to weaken in mid-2014 and continued to 140 decrease throughout the third and fourth quarter. 120 • October’s index reading showed the biggest month-on-month drop in expectations of home 100 value since the beginning of 2014. • This suggests that consumers are becoming aware of the cooling in the housing market. • If this perception translates into an expectation that prices will decline it is likely that demand will weaken as buyers choose to postpone purchases. 80 60 40 20 0 Dec Apr- Aug Dec Apr- Aug Dec -09 10 -10 11 -11 12 -12 13 -13 14 -14 Source: You. Gov/Cebr The Prospects Service © Centre for Economics and Business Research, 2015 8

Housing Prospects January 2015 Mortgage lending constrained by more rigorous requirements Approvals for secured lending to individuals, £ billion • The MMR recommendations appear to be restricting finance to certain potential buyers, reducing the overall stock of mortgage lending. • This, combined with high deposit requirements, acts as a barrier for some first time buyers to enter the market. • However, a pick up in transactions resulting from stamp duty reform and government efforts to assist home buyers via various schemes e. g. Help to Buy have resulted in a slight upward revision to Cebr’s forecasts of secured lending approvals to individuals. 400 350 300 250 200 150 100 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 • The mortgage market review (MMR) guidance introduced in April 2014, aimed at curbing risky lending and borrowing, has weighed down on mortgage approval numbers as households now need to pass more stringent requirements in order to obtain a mortgage. September 2014 forecast January 2015 forecast Source: Bank of England, Office for National Statistics, Cebr analysis The Prospects Service © Centre for Economics and Business Research, 2015 9

Housing Prospects January 2015 House price affordability to improve in 2015 • • • The jump has been particularly pronounced in London, where strong growth in house prices means that deposit requirements are now a significant barrier to getting on the property ladder. However, lower house prices next year and an acceleration in earnings growth are expected to bring about a reduction in the house price-to-income ratio over the coming years. Although the ratio is forecast to fall back, it is expected to remain higher than that seen in the early 2000 s. 6. 50 6. 00 5. 50 5. 00 4. 50 4. 00 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 • The house price-to-income ratio has jumped sharply this year as price growth has outstripped very weak earnings increases. House price affordability: ratio of house prices to average annual household disposable incomes Source: Office for National Statistics, Cebr analysis The Prospects Service © Centre for Economics and Business Research, 2015 10

Housing Prospects January 2015 Mortgages to remain relatively affordable despite pending rate rise • The Committee is expected to raise base rates from their current low of 0. 5% to 2. 0% by the end of 2016 with the first rise expected in November 2015. • The increase in the base rate will push up borrowing costs for financial institutions and a proportion of this cost is likely to be passed on to mortgage holders. • However, even when this does happen, the pace of rate rises will be very gradual, with the Bank of England Bank Rate remaining much lower than pre-crisis norms. This means that, compared to pre-crisis levels, mortgages will remain relatively affordable going forward. 8. 0 Bank of England base rate and standard variable (SVR) mortgage rate 7. 0 6. 0 5. 0 4. 0 3. 0 2. 0 1. 0 0. 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 • As spare capacity remains and sources of inflationary pressures are very limited, the Bank of England’s Monetary Policy Committee still does not face substantial pressure to change the base rate of interest. Bank Rate SVR Source: Bank of England, Cebr analysis The Prospects Service © Centre for Economics and Business Research, 2015 11

Housing Prospects January 2015 Stamp duty reform to limit activity in London, but boost transactions in rest of the country • Under the new stamp duty system, announced in the Autumn Statement, tax will not be charged on property values up to £ 125, 000. The value of a house between £ 125, 000 and £ 250, 000 will be taxed at 2%, with higher rates for more expensive houses. Values above £ 1. 5 million will be taxed at the top rate of 12% on everything over that threshold. Stamp duty bill Stamp duty land tax (SDLT) payment amount by property value, previous and new SDLT system £ 200, 000 £ 150, 000 • Based on Cebr analysis the reform will translate into lower stamp duty payments for 98. 3% of home buyers and only those buyers at the very high end of the property market will end up paying more. £ 100, 000 • As the graph illustrates, stamp duty payments under the new system consistently surpass those of the existing one around the £ 1. 1 million property value mark. £ 50, 000 • This is welcome news for the vast majority of home buyers that stand to save on stamp duty payments and is thus expected to boost transactions in most regions. £ 50 0 , £ 5 000 00 , £ 7 000 50 £ 1 , 0 00 0 £ 1 0, 0 , 2 00 5 £ 1 0, 0 , 5 00 0 £ 1 0, 0 , 7 00 5 £ 2 0, 0 00 0 £ 2 0, 0 , 2 00 5 £ 2 0, 0 , 5 00 00 , 0 00 £ 2 • However, as London property prices are the country’s highest more buyers in the capital fall into the 1. 7% that are subject to a higher payment under the new system. In fact, nearly 60% of all homes subject to a higher payment are in London. Still, as most London homes are priced below £ 1. 1 million, the effect on transactions in the capital will not be massive. House price New stamp duty system Incumbent stamp duty system Source: Office for National Statistics, Cebr analysis The Prospects Service © Centre for Economics and Business Research, 2015 12

Housing Prospects January 2015 Nearly 100% of homes affected by mansion tax would be in London and the South East • Based on Cebr analysis nearly all (95%) of UK homes valued above £ 2 million, and thus subject to the proposed mansion tax, are located in London and the South East. Number of potentially mansion tax-eligible households across Great Britain 90, 000 • In order for gross revenue raised to equal the £ 1. 2 bn 80, 000 that the Labour Party has estimated, the average 70, 000 mansion tax payment in 2016 for home owners whose properties are valued above £ 3 m is £ 24, 052. 60, 000 50, 000 40, 000 The Prospects Service © Centre for Economics and Business Research, 2015 st M Ea e Hu m be r id la nd s W a No les rth Ea st s nd la id Th & Yo rk sh ire W es t. M rth W es t t W es No h ut Lo • The prospect of new taxation on wealth and property in the future is likely to lead to a significant reduction in demand at the top end of the housing market among domestic and foreign buyers. UK property seems like a less safe investment given the risk of increased taxation. nd on So ut h Ea st • If the mansion tax was not to be introduced, average 20, 000 house prices in London and the South East would likely witness stronger growth. Cebr estimates that if the 10, 000 mansion tax proposal is not implanted UK average 0 house prices would decrease by 0. 4% in 2015, compared to a 0. 6% decrease with a mansion tax. Ea st 30, 000 So • Given the magnitude of the average payment, the mansion tax, if implemented, would place substantial downward pressure on prices of prime property, in London especially. 2016 2020 Source: Land Registry, Cebr analysis 13

Housing Prospects January 2015 Taxation reform to boost transactions in 2015 • In the first half of 2015 transaction activity will be limited by electoral uncertainty as well as anticipation of the outcome of the mansion tax proposal, although the latter only impacts a very small portion of the market. Assuming a mansion tax proposal is adopted in some form, in the second half of 2015 transaction numbers will increase as home owners adjust to the mansion tax announcement e. g. sell properties near the threshold. • Post-2015 interest rate rises will contribute to more subdued growth in housing transactions. • While the number of housing transactions is expected to increase over the medium term, transaction numbers will remain well below their pre-crisis peak due to tighter lending rules and worse affordability. The Prospects Service 1400 1200 1000 800 600 400 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 • We have revised up our forecast of housing transaction numbers in the short-term, as homeowners adjust to the announced property taxation reform, especially the new stamp duty system. Annual number of housing transactions, thousands, England Wales only September 2014 forecast © Centre for Economics and Business Research, 2015 January 2015 forecast Source: Land Registry, Cebr analysis 14

Housing Prospects January 2015 London house prices dip amidst higher taxation of prime property 5% 0% -5% 2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 -10% 2005 • In addition, foreign demand for London property is diminishing. Sterling appreciation is making London property less affordable foreign buyers. Also, concerns over the mansion tax (which under the current proposal may be higher foreign homeowners) are partially tarnishing the country’s safe heaven status. 10% 2004 • Of the homes that would be subject to a mansion tax payment in 2016, 84% are in London. 15% 2003 • Under the new stamp duty system, 98% of home buyers will face lower payments. Still, of those properties that face a higher charge, the majority are in London. 20% 2002 • This downward revision is mostly a result of changes to property taxation in the UK. The new stamp duty system and the proposed mansion tax both increase tax payments for buyers of prime property - the vast majority of which is located in London. Annual percentage growth in London mix-adjusted nominal house prices 2001 • In this edition of the Housing Prospects we have downgraded our 2015 London house price growth forecast from -2. 6% to -3. 4%. Source: Office for National Statistics, Cebr analysis The Prospects Service © Centre for Economics and Business Research, 2015 15

Housing Prospects January 2015 Foreign demand for London property to weaken 700, 000 600, 000 500, 000 400, 000 300, 000 200, 000 100, 000 2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 0 2005 • Finally, as various parts of the world face deteriorating economic prospects, foreign demand for property investment is expected to be more subdued in general. 800, 000 2004 • This will curb foreign demand for prime Central London property in particular. 900, 000 2003 • 2014 was the first year in which average property prices were higher than 2007 levels in dollar and euro terms, making London property a relatively less attractive investment for overseas investors from the US and Europe. Average London property prices – in pound sterling, US dollars and euros 2002 • In sterling terms, average London house prices surpassed their pre-crisis peak as early as 2010. However, the sharp depreciation of the currency following the financial crisis has until recently left London property prices below their pre-crisis peaks in US dollar and euro terms. Average London house price - $ Average London house price - € Average London house price - £ Source: Office for National Statistics, Cebr analysis The Prospects Service © Centre for Economics and Business Research, 2015 16

Housing Prospects January 2015 Northern regions play catch-up as house price growth in London slows 10% 0% -10% -20% -30% House price growth 2007 -13 House price growth 2014 -20 Source: Office for National Statistics, Cebr analysis The Prospects Service © Centre for Economics and Business Research, 2015 17 East Midlands West Midlands South West Scotland Wales North East of England UK Northern Ireland -50% Yorkshire & Humber -40% North West • House price growth in the North West of England, Yorkshire & the Humber, and Northern Ireland is expected to be among the strongest in the years up to 2020. This reflects the fact that house prices in these regions (unlike London and the South East) are currently below their pre-crisis peaks. The relative affordability of house prices in these regions will lead to a significant amount of “catch up” growth in the short term. 20% South East • London price growth, while still the strongest of all the regions over the 2014 -2020 period, has been revised down sharply given the decline in prices expected in 2015. 30% London • Our revised house price forecasts show a variation in house price growth that is more nuanced than a traditional North-South divide. Total growth in regional house prices: historic and forecast

Housing Prospects September 2014 A boost in supply to limit house price growth Number of housing starts in the UK • In addition to some demand side weakness, an 400, 000 increase in housing supply is further expected to place downward pressure on prices in the 350, 000 medium term. 300, 000 • In the year ahead housebuilding in London will likely be faster than at any time since post war 250, 000 reconstruction. 2020 -21 2016 -17 2012 -13 2008 -09 2004 -05 2000 -01 1996 -97 1992 -93 1988 -89 1984 -85 1980 -81 1976 -77 • The government is also putting in place a 100, 000 scheme which offers first-time buyers under the age of 40 a discount on newly build homes. 50, 000 This measure combined with largely stable house prices will somewhat assist first-time 0 buyers to get on the property ladder, although deposit requirements remain a burden. 1972 -73 200, 000 • Housing supply growth will be supported by government policy measures to ease planning 150, 000 constraints and boost construction activity. Source: DCLG, Cebr analysis The Prospects Service © Centre for Economics and Business Research, 2015 18

Contact For enquiries on this publication please contact the author: Nina Skero +44 (0) 20 7234 2876 nskero@cebr. com © Centre for Economics and Business Research ltd Unit 1 4 Bath Street London EC 1 V 9 DX T 020 7324 2850 F 020 7324 2855 E advice@cebr. com