On the 8th of June, the General Election delivered a hung parliament. This essentially means that, although the Conservatives have more seats in parliament than any other party, they don’t have an overall majority and therefore are unlikely to secure the support to drive through their political agenda as easily as they would have done before the election.
On the surface, that doesn’t seem to be a major issue from a property market perspective. The Housing White Paper that the Government produced in February set out a housing strategy that is fairly in line with what other political parties were suggesting during the election. It proposed support for Help to Buy to encourage more new builds, increasing the number of affordable homes, improving tenants’ rights and reducing homelessness. So, policy-wise, the hung parliament isn’t likely to see a huge change in direction.
However, the three biggest influences on the performance of the property market are (a) the economy, (b) people’s ability to buy, sell and rent property and (c) their confidence to do so, and this is where a hung parliament can and almost certainly will have an effect. When the party in power has no clear route forward for governing, that creates uncertainty, which reduces confidence, which, in turn, could result in reduced property market activity.
Over the past few years, the UK economy has been robust. Now, although it is still performing well, there are signs that it won’t perform quite as well as the last few years.
The biggest impact on the property market is likely to come from the fact that wages are now rising at a lower rate than inflation. In other words, the average worker is getting a ‘pay cut’ in real terms this year, as the cost of living goes up by more than income. If we look to the Belvoir Rental Index for the period covering the last recession, it shows that the majority of areas across the UK saw rental growth flat line, supporting the principle that rents tend to move in line with wage growth.
This may or may not be an issue for landlords this year, depending on how hard hit they are by the increases in taxation. For those landlords that need to increase rents this year due to reduced profits, if the market doesn’t allow for that, it could mean a few lean years from an income perspective.
On the positive side, the second impact of a slowing economy could be a bonus to investors looking to expand their portfolios. When the property market is slow, those people who need to sell as quickly as possible and are struggling to do so will often take a reduced price, and that’s always good news for smart investors that are able to spot a deal and offer a speedy transaction.
The Council of Mortgage Lenders (CML) states that property transactions tend to reach around 100,000 a month, but the Monetary Policy Committee, who decide on the level of interest rates, believe property sales will fall to around 71,000 a month for the rest of the year. The fall in purchases is coming from lower investment in buy to let due to the tax increases and fewer people moving home. So far, the number of first time buyers has been growing, but their numbers are expected to fall as well.
When the number of transactions in the property market falls, typically prices soften or head into the negative. And although no-one is expecting the 18% falls experienced during the credit crunch, the latest data from Hometrack shows house price inflation in cities has fallen from 8.8% to 5.1% so far this year. The South is particularly being hit after a good recovery in prices since the credit crunch, with London price growth down from 13% to 3% and Cambridge seeing a reduction from 13% to 2%. So, although prices are still growing, it is at a reduced rate and that may mean that investors who have struggled to find bargains in these areas over recent years may now be able to do so.
Ability to buy, sell and rent
Overall, although activity is expected to slow in the market, it isn’t expected to dramatically collapse unless an unexpected economic headwind arrives. It is also important to remember that although demand is reducing, the supply of property is still at an all-time low. And what happens moving forward will be very individual to both area and property type, so it’s essential to talk to your local Belvoir agent to find out about the specific market dynamics in your area.
Assuming it is implemented, the other ‘good news’ is that Mark Carney, the Governor of the Bank of England, announced during the Mansion House Speech in June that although prices were rising fast, he didn’t feel it was the ‘right time’ to raise interest rates. This hopefully means that the historically low rates will continue, keeping mortgage costs down for those who own, invest and let property.
The only downside is that the tightened criteria for lending following the Mortgage Market Review, in addition to the recent crackdown on buy to let lending, may make it more difficult for investors. However, as this in itself tends to restrict what people can pay for properties, it can actually help keep the cost of investing down ongoing.
The big question moving forward is, what will happen from a consumer confidence perspective, as this always has an impact on the property market.
Taking two of the various indices that track confidence:
GfK’s Consumer Confidence Index: Personal Financial Situation
This increased by one point in May to +2; two points lower than at the same time last year. The forecast suggests that although this will improve as the year goes on, it’s still lower than 2016.
YouGov/Cebr Consumer Confidence Index
Similar to GfK, they are picking up a decline of -0.2 points to 107.9. It’s important to note that any score over 100 shows more people are confident than ‘unconfident’ but it does mean people are as nervous as they were when we voted to leave the EU last year.
On the other hand, their quote on people’s views on housing suggests many are still positive about the future of the property market: ‘Homeowners’ expectations for property prices over the past month are unchanged while they have become slightly more optimistic about house values over the coming year. Property prices remaining resolute is currently the main thing giving consumers confidence.’
Overall, it appears that as long as we don’t have too many economic ‘wobbles’ over the next 6-12 months or ‘Brexit bad news’ and the current government can navigate its way through a hung parliament, then the market looks to be a reasonably healthy one for landlords. Some will just need to check and double-check the impact of the tax changes on their profitability, while those that already have a new strategy may be able to pick up some good buys before the year end, to strengthen their portfolio.