Source Newsletter February 2016

24 February 2016

Welcome to this month’s newsletter from Source Investments which reviews current information relevant to both existing and prospective buy to let investors.

House Price Rise Statistics – Main findings

Information released on 16^th February by the Office of Statistical Information reveals the following trends in house price movements in the period up to 31^st December 2015.

UK house prices increased by 6.7% in the year to December 2015, down from 7.7% in the year to November 2015.

House price annual inflation was 7.3% in England, 1.0% in Wales, -0.2% in Scotland and 1.5% in Northern Ireland.

Annual house price increases in England were driven by an annual increase in the East (9.7%), London (9.4%) and the South East (8.8%).

Excluding London and the South East, UK house prices increased by 4.6% in the 12 months to December 2015.

On a seasonally adjusted basis, average house prices decreased by 0.2% between November 2015 and December 2015.

In December 2015, prices paid by first-time buyers were 6.4% higher on average than in December 2014.

For owner-occupiers (existing owners), prices increased by 6.9% for the same period.

House asking prices hit all-time high of £299,287

A more up to date snapshot is offered by Rightmove according to whom asking prices for properties in England and Wales have increased by £8,324 this month meaning that house sellers are now seeking an average of £299,287 across England and Wales.

The figure is an increase of £8,324 or 2.9 per cent from the average asking price in January, and is £2,738 above the previous all-time high set in October 2015.

The biggest increases were in London, where the average asking price has risen by 10.5 per cent over the last year, to £643,843, and in the East, where it rose 10.7 per cent to £321,630.

Rightmove also advised that demand for housing has increased to record highs, with 4.9 million phone and email enquiries last month, however there are now “welcome signs of fresh supply increasing, with the volume of new properties coming to the market at the highest level since the credit crunch of 2008. All be it that the increase is “patchy”, with only London, the South East, the South West and Yorkshire and the Humber seeing above-average increases in stock. In the West Midlands, stock is down and the North West and Wales have only seen small stock increases”.

The most common property types coming up for sale were those with two bedrooms or fewer – typically sought by first-time buyers – with the number of such new properties up by 10 per cent on this time last year.

Rightmove also claim that 2016 could end up being “the year of the first-time buyer” due to the increased supply of such properties, combined with “low interest rates, initiatives such as “help to buy”, and buy-to-let investors facing increasingly adverse taxes”.

Rightmove director Miles Shipside said the increase in these property types coming to market could be due to a wave of first-time sellers putting their homes on the market ahead of a stamp duty increase for buy-to-let investors in April 2016.

UK Interest Rates

Latest information from financial media organisation Bloomberg is that financial markets now believe there is only a 50% chance that the Bank of England will cut rates this year

Some investors even believe that UK interest rates will remain on hold until August 2019 (which would mean over a decade of record low rates) although this was robustly contradicted by Sir Jon Cunliffe the Bank’s deputy governor for financial stability who said that such views were just “plain wrong”. Cunliffe remains at odds with the consensus city view that no increase will occur this year.

Only last month, Morgan Stanley’s closely-watched index, which compiles traders’ bets on interest rates, showed the Bank’s base rate was likely to rise from 0.5pc as early as October this year.

The extraordinary reverse on predictions came following a warning from US Federal Reserve Chairman Janet Yellen that the continuing downturn in the world economy coupled with the recent volatility in financial markets might mean that US interest rates will stay low for longer. Only just over a month ago the US central bank had raised its rates by a quarter of a percentage – the first increase for nearly a decade.

“The economic outlook is uncertain,” she told Congress, noting that investors “have become fearful about a recession”.

The expectation that the US Federal Reserve will delay further rate hikes combined with the decision of the Bank of Japan in January to introduce negative rates and dovish messages from the European Central Bank have pushed back expectations for UK interest rates.

Further evidence that any rate hike will be deferred also came from Gareth Ramsay, the Bank of England’s head of monetary analysis who told Reuters that “the Bank have started to hear from businesses that low inflation is affecting some businesses’ pay. That’s a real amber warning light for us, a really important message. We really want to be well-sighted on that area and there’s no official data source that’s going to tell you that.”

Meanwhile Mr. Ramsay’s boss, Mark Carney, the Governor of the Bank of England said that “an unforgiving global environment was likely to weigh on Britain’s recovery and keep inflation well below the Bank’s 2pc target in the near-term”. However asked last week if he believed the next move in interest rates was more likely to be up than down, he replied “absolutely”.

The probability of a continuation of the record low bank rate means that competitive mortgage rates will continue to be available for the foreseeable future.

Lending to Landlords Slowed in December

The latest monthly lending information released by the Council of Mortgage Lender’s this week showed that gross buy-to-let lending fell around 3% both by volume and value compared to November.

This is a surprise given that there is an expectation of increased activity in the rush to beat the looming stamp duty surcharge on investment properties.

Despite the December downturn gross buy-to-let lending still rose 28% by volume year-on-year and 39% by value to hit its highest level since 2007.

Views are mixed on whether this dip in month to month figures suggests that the wheels might finally be coming off the buy-to-let wagon or is just a pre-Christmas blip. Until a consistent trend can be established most analysts agree that there is no reason to panic.

Jonathan Harris, director of mortgage broker Anderson Harris was not alone in condemning “the succession of draconian measures introduced by the Government” and said they will hit demand, especially from more speculative investors. But those landlords who are looking for long-term investments are unlikely to either sell up on masse or desert the sector in droves.”

David Whittaker, managing director of Mortgages for Business, blamed the slowdown on the sluggish winter months.

“The buy-to-let sector still accounts for around 18% of the overall mortgage market, a remarkably steady performance compared to previous years.”

Jeremy Duncombe, director, Legal & General Mortgage Club, said: “With the new stamp duty changes now firmly on the horizon, buy-to-let lending is likely to spike due to a surge in demand in the first few months of 2016.”

The big question is what happens to buy-to-let after the surcharge kicks in on 1 April.

Duncombe said he expected the lack of supply will continue to limit choice and drive homebuyer demand after 1 April, keeping prices high.

One million more families now renting

According to the government’s latest English housing survey the number of families privately renting homes has increased by one million in the last 10 years which brings the total figure to 1.6 million households, an increase of 50pc over the previous five years.

Some analysts suggest that the significant rise of families renting shows that renting will no longer be applicable just to young professionals and also raises questions about the availability of appropriate properties in the sector. Particularly as the figures also reveal that the percentage of people who privately rent and expect to buy in the future has declined from 61pc in 2013-14 to 57pc in 2014-15, a seven-year low.

However many analysts are urging caution before jumping to the conclusion that this is a long term trend particularly as other information included in the survey suggests that the long-term decline in home ownership has paused in the last year, with 64pc of households being owner-occupiers. This bucks a trend of decline that began in 2003.

The report also revealed that the average age of a first-time buyer has increased from 31 to 33 over the last decade.

Despite government demands for more affordable housing to support greater home ownership the survey highlights that it is just as important that households on modest incomes, particularly those with children, don’t miss out on the action.

Campbell Robb, the chief executive of Shelter, said: “These figures are a stark reminder that for millions of families and young people it’s becoming utterly impossible to create a stable future in a place they can really call home.

“Instead of being able to put down roots, more and more people are stuck spending vast amounts of their income on rent, while house prices continue to rocket out of reach.

“Despite being in power for six years, this government has made little progress on the underlying cause of our housing crisis – the chronic shortage of genuinely affordable homes. It doesn’t have to be like this, but things will only change when we start building homes that people on ordinary incomes can actually afford.”

Housing minister Brandon Lewis said: “In 2010 there was a housing market where buyers couldn’t buy, builders couldn’t build and lenders couldn’t lend.

“Our efforts are turning that around with more than 270,000 families helped into home ownership through government-backed schemes since 2010, while the number of new homes is up 25pc over the last year.

“And we’ve set out the boldest ambition for housing in a generation, doubling the budget so we can help a million more people into home ownership, while delivering a bigger, and better private rental sector.”

As the arguments continue to rage the inevitable time lag in making good the huge short fall in new housing stocks suggests that family demand for rented accommodation will continue to increase in the foreseeable future.

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