As property experts, we’re always looking at where we are in the property cycle as knowing that helps us advise all our clients on the best course of action. At the top level, 2017 has marked a watershed year between the end of the last market cycle (which started in 2009) and the start of a brand new one. As is typical of times like this, the market has slowed down and a ‘cold front’ has moved across the country, starting in central London and moving outwards (get your hats and gloves ready).
It is something of a mystery why property market cycles happen, but the standard explanation is that after a period of seven-ish years of continuous house price growth, buyers become more reluctant about stretching towards the asking price of the seller. When this starts happening, negative sentiment rushes through the market. As soon as asking prices start to fall, buyers compound the problem by waiting to make an offer in the expectation that prices will fall further. Eventually, buyers will ‘call the bottom’ of the market, and start making offers again and the market begins to thaw.
Hot spots (and cold spots)
As the curtain starts to fall on 2017, different parts of the country are at different ends of that process. Central London for example, is already starting to see the light at the end of the tunnel. Sellers took a very pragmatic approach to the offers early on in the year and the market did not stagnate for long. Having said that there are areas which have failed to shake off the cold as quickly. At the far north of the country, the market is doing well because prices did not rise as fast, so buyers haven’t felt so stretched as to dig in on offers. But the main reason the north is doing well, and housing market in the rest of the country is likely to bounce back soon, is that the national economy is actually doing fine. And the key element within that is that mortgage lending has remained strong - there are no fears that mortgage finance is struggling.
Because we’re not yet at the end of the year, we don’t have a full picture of how the market performed in 2017. However, based on our projections and expectations, we think prices will have risen by 2.9 per cent over the year on a national basis. Regionally, we expect the best performing part of the country to be the south east where prices should have risen by 5.7 per cent, followed by the east where prices will have risen by around 5.6 per cent. At the other end of the spectrum we think the weakest performing region will be the north east where prices will have fallen by just under 1 per cent in the year.
Projected house price growth by region during 2017
Rental has been stable
In the rental market, the greatest annual growth in rent will likely be in the midlands where they should have grown by 3 to 3.5 per cent. The weakest growth will be in London and the south east where it will probably end up only a fraction over zero per cent. So good news for renters in the southern part of the country, but less exciting for landlords.
So what does this mean to people who are currently renting? George Osborne (remember him?) had an idea. The idea was that if he raised the tax on second homes, which includes people buying buy-to-let properties, it would stop the flow of newly built homes going straight into the rental sector. The aim was to drive down price inflation of new homes by making more of them available for owner-occupiers to buy (because when supply goes up, prices go down). It’s too early for the data to show how successful this has been. The main detectable impact thus far has been to limit demand for homes by buy-to-let landlords which has contributed to the general market slowdown. It may have contributed to the weaker rental growth figures, but it’s impossible to unpick how much of that is down to Osborne’s policy vs change in other factors.
It’s very difficult to get good figures on house building, particularly recent data, but looking at property transactions in the Land Registry which are marked as new build, we can see the largest number of those in 2017 so far have been in the south east (16.5 per cent of the total). This is followed by London (16 per cent) and the east of England (10.7 per cent).
Regional distribution of new build sales in 2017
So 2017 will be seen as the year where one property market cycle ended and another began. Interest rates were raised for the first time at the start of November which means homeowners on variable mortgages will have more to pay per month. Yet we don’t expect that rates will move too far away from their historic lows. And even if they did, it would just be more evidence that the economy is returning to its long term balance after the cataclysmic events of the credit crunch.
We think that 2018 will be dominated by Brexit, with the twists and turns of the negotiations quickly affecting currency values and stock exchanges. However, the housing market will probably be the most uneventful (in a good way) part of the economy as it goes about its business. From spring onwards, maybe sooner, we will start to see a national recovery. Because lending didn’t get out of hand in this cycle and it didn’t therefore cause a build up on prices, it ensured the market had a soft-landing. And it was this ‘soft-landing’ which characterised the property market in 2017.