ham1316-marketinsight-september-lr

Market Insight
It’s Written in the Stars
www.hamptons.co.uk
Beyond your expectations

Market Insight
Looking Ahead
A shift in sentiment changes the
outlook for price growth.
It’s that time of year again. Not just back to
school, but a time to reassess and refocus on
where the housing markets are likely to go over the
next couple of years. That means re-examining our
forecasts for 2014 to see what has changed and what
we might expect ahead.
2014 has been an exciting year, especially in
Hamptons International’s heartlands of London
and the South East. Price growth in England and
Wales isn’t too far away from our expectations but
we’ve revised up our forecast for 2014 from six to
eight per cent, partly because of the tremendous
pace of growth already seen in London.
While we thought that affordability conditions
would bite earlier this year in the capital, it seems
that there has been a lot more momentum. That
has helped to fuel expectations and to boost price
growth further. Prices have been growing at 16
per cent in the capital, but this pace of growth is
waning. We expect price growth to end the year at
about 15.5 per cent as we witness more resistance to
high prices and the effect of the regulator’s policies.
While these regulations may not bite as hard as
some have suggested, the effect on sentiment is
clear and that too will affect the pace of growth.
2015 is more interesting. It’s an election year and
the housing market will be on the agenda of all
the political parties. But that doesn’t mean that
economic conditions and new regulations won’t
have a bearing on how the market performs.
Wage growth is low and even when it picks up it’s
not expected to be large once inflation is taken
into account. That means that affordability won’t
improve very rapidly. On top of that there are the
regulations introduced by the Financial Policy
Committee governing current and future mortgage
affordability and banks’ exposure to higher loan to
income ratio loans. Both of these means that there
will be a limit to the rate at which finance will be
available to satisfy demand in the frothiest parts of
the country. That too will limit the pace of growth
– and help to dampen expectations about how
quickly prices will rise in future.
All that adds up to much lower growth in house
prices in 2015 – particularly in London where
affordability is most stretched. But there are parts
of London where we expect price growth to remain
more buoyant, although still significantly lower
than 2014. The central London areas – including
boroughs abutting the prime central areas but
a little further out - will benefit from demand
displaced from the PCL markets where stock is low
and prices high. In addition these sectors of the
market are favoured by wealthier homeowners
with less concerns about the availability of credit.
Nevertheless they are not immune to changes in
sentiment, and hence to resisting rapid price rises.
As a result we are forecasting a cooling in the pace
of growth in 2015 here too.
“ A change in sentiment
over the rate of future price
growth has affected the whole
of the country.
2
www.hamptons.co.uk

September 2014
In prime Central London our view is unchanged
from last year – except everything has shifted
forward. The continued rapid pace of growth in
2014 means that the capacity for further growth is
more limited, especially because as the economy
recovers there are opportunities to get improved
yields elsewhere. There are risks - largely to the
upside - as geopolitical unrest causes investors
to look for safe havens, but Britain’s relatively
good economic conditions will affect the sterling
exchange rate adversely for overseas buyers.
Hamptons International House Price Forecasts
Source: Hamptons International
England & Wales
2014 8%
2015 5.5%
Greater London
2014 15.5%
2015 3%
South of England
2014 8%
2015 6.5%
Prime Central London
2014 10%
2015 3%
Central London
2014 18%
2015 7%
© Hamptons International 2014
3

Market Insight
The Bright Side of Life
The economy continues on the path of recovery
but it’s a long way from ‘normal’.
he latest set of forecasts from the Bank of
T England sets out an almost idyllic scenario.
Economic growth picking up - to almost twice the
rate as last year; inflation remaining within target
– so taking the pressure off an early rate rise; and
wage growth expected to become stronger - but
not so strong to threaten inflation and hence need
higher interest rates. This is all great and long
awaited. But it’s easy to forget that these gains are
from a low base after the great recession and that
while things are getting a little more comfortable,
they are far from ‘normal’ yet.
The biggest risk to this uplifting outlook is wage
growth. The fact that it has been so low while
unemployment has fallen so fast is a puzzle to
economists. If it’s because the recession has had
a lasting structural effect on the jobs market
meaning that workers now settle for lower pay
than in the past, that will delay the pace of recovery
and will be a drag on the housing market. But
if things behave as they have in past economic
cycles, as the economy recovers there will be skill
shortages which will bid up wages. In addition,
new job creation will stimulate more churn in the
labour market, thus bidding up the average rate of
pay growth to hire and retain the right staff. That
would be a better scenario for the housing market
affordability, but has implications for inflation and
hence interest rates.
From where we stand now the risk of an early rise is
low, even though some members of the MPC voted
for a rise last month. But when they do rise, we don’t
really know how consumers and businesses will
react. Will banks pass on higher rates and if they
do how will that affect households and smaller
companies with high levels of indebtedness If
households are stretched that’s bad for the housing
market – especially if it leads to a rise in arrears
and possessions.
There are always risks of course, but the UK
economy is in a good place. The only thing to
beware of is expecting things to get back to
normal too quickly.
The Latest Set of Forecasts from the Bank of England
Source: Bank of England Inflation Report
Bank of England Projections
98-2007 avg 2013 2014 2015 2016
Bank Rate 5.0 0.5 0.6 1.3 2.0
GDP 1.9 1.7 3.5 3.3 2.6
Inflation 2.2 2.6 1.9 1.7 1.8
Wages 3.5 1.2 1.3 3.3 4.0
Real Wages 1.3 -1.4 -0.7 1.6 2.2
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September 2014
About Turn
Pressure on rents from increasing demand is competing
against sluggish wage growth.
The rental market has seen a shift in dynamics
over the last few months, bringing to an end
a two year period of near or below inflation price
growth. Increasing demand from new tenants
and a fall in the supply of homes available to rent is
putting pressure on rental values, particularly in
London and the rest of the South of England. There
were 22 per cent more applicants looking for rental
homes in July compared to the previous year, but
the stock of homes for them to rent is down by 6
per cent over the same period. There are now five
tenants looking for every property available to let,
up from four at the start of the year.
The recovering economy, a pause in the sales
market and migration into London and the rest
of the South is fuelling demand. Whereas strong
capital appreciation in recent months and worries
about future house price growth is causing some
investors to sell stock, which is reducing supply.
In the short to medium term it’s likely that these
market conditions will cause rents in England and
Wales grow faster than wages and inflation. While
a continued economic recovery means that rental
demand is likely to remain strong keeping upward
pressure on rents, slow wage growth will limit the
rate at which they can rise.
Much of the pressure in the rental market is
surfacing in London and the South East. There are
particularly strong rises in demand in the South
of the country and many of the more affordable
London markets. As a result we expect Greater
London and the South of England to see higher
rental inflation than the rest of the country.
“The rental market has seen
an influx of demand in recent
months putting pressure on rents
The outlook has changed for most sectors of the
rental market, but in the prime areas of Central
London such as Mayfair, Knightsbridge, Chelsea
and Kensington, looks set to remain subdued.
Unlike less expensive central areas, high prices are
limiting demand and good levels of stock in prime
areas are keeping growth flat. We‘re forecasting
rental price growth of 5.5% in 2014 in Central
London, but prime central London areas is likely to
see very little price growth, if any.
Hamptons International Annual Rental Price Growth Forecasts (New Lets)
Source: Hamptons International
Region 2014 Rental Inflation 2015 Rental Inflation
England and Wales 4.0% 4.5%
Greater London 6.0% 6.5%
Central London 5.5% 5.8%
South of England 5.0% 5.0%
© Hamptons International 2014
5

Market Insight
Building Supply
With Help to Buy now a big feature of the new homes market
some parts of the country have further to go on supply.
We often talk of the North/South divide in
the housing market in terms of demand and
activity, different rates of price growth and market
heat. But when it comes to housing supply and in
particular the new build element of Help to Buy,
Help to Buy Equity Loan, the split is quite different.
over the last 12 months with the previous highs
of 2006/7, shows it is London, the South East and
South West where the most progress has been
made. 24,400 homes were completed in London
last year, only 20 per cent less than in 2006
and 2007.
The latest government figures confirm that Help
to Buy Equity Loan continues to be used most
outside of London. Overall a third of all new
build completions in England made use of the
scheme in the last 12 months, but just 14 per cent
of completions in London used it. By comparison
in Yorkshire and the Humber nearly half of all
completions in the last 12 months involved
Help to Buy Equity Loan.
Whilst Help to Buy Equity Loan has been supporting
house building outside of the frothiest markets in
the South East and London, it’s not these regions
that have seen the biggest recovery in total house
building so far. In fact comparing completions
But evidence from the most recent data shows that
growth in house building completions is now more
evenly spread across most regions. This pick up in
building activity beyond the South of the country
coincides with many of those markets starting to
recover, showing more activity and price growth.
So while Help to Buy has certainly been supporting
many new build sales in areas of the country with
slower housing markets, we’re yet to see exactly
how much the scheme has contributed to actual
new home delivery. Leaving us wondering whether
most of the growth in house building has been
driven by the usual market forces associated
with a housing market in recovery rather than
government intervention.
W
H2B as a Proportion of New Homes Completions
E.
Completions as a % of 06/07 Highs
Completions as a % of 06/07 Highs
Jan 10
Jun 10
% Nov of New 10 Homes Sold with H2B
60%
50%
40%
30%
20%
10%
Apr 11
0%
Sep 11
Yorks &
Humber
Feb 12
N. East
W. Midlands
Jul 12
N. West
Dec 12
E. Midlands
May 13
S. West
Oct 13
East
Mar 14
England
S. East
London
Source: DCLG
W. Midlands
N. East
Yorks & Humber
N. West
E.Midlands
East
England
S.East
S. West
London
0% 20% 40% 60% 80% 100%
% of Peak
Source: DCLG
6
www.hamptons.co.uk

September 2014
Activity over Prices Please
Transaction levels are a far superior indicator of
housing market health than house prices.
The way that the sales market develops depends
on the wider macro-economy, the availability
of mortgage credit and sentiment. These are also
the drivers of house price growth, but forecasts
of prices tell only half of the story. The level of
transactions is far more important as a signal of
the true health of the market.
The latest data show that the pace of transactions
growth is already slowing. Mortgage approvals
are down and so are the numbers of transactions
recorded by the Inland Revenue. Adjustments to
mortgage regulations may tell some of the story
but the market background also has a part to play
– especially in London. Indeed the total value of
mortgage approvals has been broadly stable since
the start of the year.
Looking ahead the good news is that the total
numbers of transactions are likely to continue to
rise. The less good news is that the pace of that
rise will slow. There is some resistance to higher
house prices, particularly in the frothier sectors
of the market, as weakening sentiment and
affordability constraints take effect. But the silver
lining is that more stock is coming to market which
helps liquidity and so supports transactions. The
slowdown in the pace of transactions growth is
likely to be sharper in London and the south because
of both affordability and lower expectations of
future price growth.
Then there is the election. There is evidence that
uncertainty before polling day causes a pause
in activity about 3 months beforehand. Most of
those are recovered immediately afterwards and
only about 3.5% are ‘lost’. That proportion may
be slightly higher in the wealthier sections of
the market where there is more discretion about
purchases of second homes for example.
The overall direction of travel is a slowing in
activity at the start of 2015, but with a recovery in
the last two quarters. That would bring us back to
transactions levels similar to 1996. This is not as
much of a slowing as some people suggest. It’s easy
to forget the better state of the economy and the
fact that activity in most of the country is still
recovering from a low base.
Seasonally Adjusted Housing Transcations and Mortgage Approvals (Monthly)
Source: BoE, HMRC
160
140
120
100
Apr 06
Sep 06
Feb 07
Jul 07
Dec 07
May 08
Oct 08
Mar 09
Aug 09
Jan 10
Jun 10
Nov 10
Apr 11
Sep 11
Feb 12
Jul 12
000s
Dec 12
May 13
Oct 13
Mar 14
80
60
40
20
0
Transactions
Approvals
© Hamptons International 2014
7

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©Hamptons International 2014. This report was published for
the purpose of general information and Hamptons International
accepts no responsibility for any loss or damage that results
from the use of content contained therein, including any errors
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sole responsibility to independently check and verify the facts
contained within this report. All opinions and forecasts within
this report do not in any way represent investment or other advice.
Reproduction of this report in whole or in part is not allowed
without the prior written consent of Hamptons International.
Johnny Morris
Head of Research
morrisj@hamptons-int.com
+44 (0)207 758 8438
Fionnuala Earley
Residential Research Director
earleyf@hamptons-int.com
+44 (0)207 758 8465
www.hamptons.co.uk
Beyond your expectations