The Article Below by Maskells was first published in Prime Resi 2016 Forecast on the 6th January 2016.
A Tale of Two Markets: Or Is It?
Anyone reading the press and listening to the Chancellor over the past 12 months would be forgiven for believing that the story of UK property was a tale of two markets – the affordable housing sector and the Prime Market. The former akin to a long- neglected dog who is now apparently receiving the attention it so desperately needs and deserves and the latter, the former Crufts winner, cowering in the corner of it kennels whimpering “enough, enough, please, enough” as The Chancellor stands over it, cane raised. But is this what is actually going on? Or is it is a story of a single market, Government intervention and long-tail consequences for the rest of the economy.
The tale of two markets starts with the affordable home sector where the Government has introduced schemes including Shared Ownership, Help to Buy Equity Loans, Starter Home Loans and the right for Housing Association Tenants to buy their homes. The need for additional housing is well understood, however getting on the ladder is as hard as ever as people struggle to find the deposit and or do not qualify for the required income multiple the mortgage demands. At the same time, the Government has cut housing association rents meaning that the associations can borrow less and therefore build fewer homes. At the other end price spectrum is the prime market where we have seen prices increase over the past 3 years, fuelled by the availability of cheap debt, which homeowners are currently able to service.
Whilst there may appear to be nothing linking these two markets, the truth is they are linked by one element – debt - something the government is very afraid of. Household debt levels dropped after 2008 and over the past 18 months have been creeping back up and their objective is to reduce this. The fear is borne from the fact that should the Bank of England need to increase interest rates, the additional burden on mortgage borrowers would be such that cash would be diverted from other parts of the economy. This fear is what led to the SDLT increase on second homes and buy-to-let properties. However 80% of mortgages are buy-to-own and we must remember that when the MMR was introduced the underwriting criteria was a strict 75% Loan to Value and 3x income multiple. This has been relaxed to 95% LTV and 4.5x income multiple so one could argue that the government really is the architect of the situation it finds itself in now. They did not give the original MMR underwriting time to take effect – it would have gradually cooled the housing sector.
Notwithstanding this, their decision to increase SDLT is ill-conceived. Whilst a large SDLT may well have the effect of cooling the market, it also has one very undesirable side-effect – it reduces liquidity so that when people really need to sell, they can’t (as the transaction tax makes the property too expensive). The natural upshot of this is rapid decrease in prices but this is where the real problem lies: Under the proposed bank capital adequacy ratios (Basel 4) the amount of cash a bank sets aside against debts in the mortgage market may be driven by Loan to Value ratios and Debt Service Coverage Ratios. The increased SDLT introduces a very dangerous scenario for the economy where bank balance sheets may be tied up as they allocate more capital to a rapidly reducing asset values thereby freezing their ability to lend.
The Government wants to reduce household debt so is not incentivised to make the affordable housing schemes available to all as this would increase debt levels. At the same time it does not want Middle England burdened with unaffordable monthly mortgage payments. It does strike us however that the increase in SDLT is akin to shutting the stable door once the horse has bolted. An alternative approach may be to limit the amount of mortgage debt available each month rather than the price of debt so that we do not find ourselves in a distressed market. Are we in a house price bubble? Continued Government tinkering we may well produce one and this will affect the economy as a whole and not just the housing market. And as for Prime Central London and cash buyers in general, they are just a victim of the current situation where it would political suicide to tax only those seeking to take out a mortgage.
Maskells Forecast:
Given the driving force behind government intervention in the housing market to date has been reduction of household debt, we do not see this changing during 2016. As such we see the Prime Central London market asking prices remaining flat with vendors accepting small discounts to sell - these properties were expensive to buy and Vendors, unless forced, will wait for the right buyers. As to Prime London, for the first half of the year we see fundamentals (the need for housing) coming into play keeping asking prices flat to +2% and achieved prices flat to 2015 however as we move into the second part of the year, we see technicals taking over, (being the willingness of lenders to carry on lending at current levels and the effect of the increased SDLT in the Buy-to Let sector from April) taking some of the forward momentum out of the market. We believe this will result in second half asking prices being flat to 2015 and achieved prices to (-2%) for 2016 year end. We would have seen a larger decrease however many new owners are locked into teaser rates for the next 2-3 years and vendors hoping for higher prices may keep their properties off the market, keeping stock levels low.
We do however see an increase in rental prices starting to creep in later this year, particularly as fewer buy to let homes are sold to individual investors, keeping stock levels flat. This may be further exacerbated if mortgage lenders tighten their underwriting criteria forcing willing buyers into rental accommodation. This rental price increase will be amplified post 2016 and thereafter as mortgage interest rate relief is reduced to a basic rate tax credit for private landlords, forcing some to seek alternative investments to Buy to Let, thereby further reducing available stock.
For the full article please see www.primeresi.com