House price growth of 17% - a retirement dream

I remember the date well which for me says something as I tend to need to write things down to remember them in detail. Many years ago today we bought our first house. A home of our own to build our life together.

 

A home can be many things too many people – a place to live, raise our children, a means of funding retirement and so forth. Hearing news that house prices are expected to rise by 17% on average across the UK over the next five years is always reassuring to hear for those funding retirement for example but there is the presence of mortgage rate rises which could impact on this growth and ultimately is the growth sustainable and needed?

 

 

Mortgage rates are apparently the gloom of the growth. A potential rate rise, if too quickly, will curtail house price growth. On the flip side, if rates remain low for too long, there is a risk that prices will rise too far, creating further affordability issues. There needs to be a gradual interest rise that curtails to an extent. A good move introduced last year was the stress testing for affordability which did cap the amount people were allow to borrow based on their income and has prevented runaway price growth but forecasted 17% growth raises a certain query whether the cap did anything at all.


Annual transaction levels, at just over 1.2m this year, are expected to reach 1.3m in 2020, far short of the pre-crunch norm of around 1.7m, as a lack of affordability slows demand.

In October 2015, house prices nationally increased by a modest 0.6% (well at least it was growth) with the annual price growth currently at 3.9% (according to Nationwide). The most interesting point is that the average house price has now exceeded the levels of 2007/8.

 

 

 

Over the past five months annual price growth has remained in a fairly narrow range between 3% and 4%, broadly consistent with earnings growth over the longer term. While this bodes well for a sustainable increase in housing market activity, much will depend on whether building activity can keep pace with increasing demand. And this is a big but!

 

So with house prices increasing and certainly more than income there is a big risk to the UK economy and hence the interest rate threat which could temper the growth to acceptable risk levels. Though in the meantime at least checking mortgage fees will be simpler following a new tariff created by the Council of Mortgage Lenders – standard terminology, consistent terminology across 85% of lenders and everything else legal you can think of.

 

Feel free to contact me 0113 288 2276 or lee.a.wilkinson@uk.pwc.com if you wish to discuss this blog or anything relevant to property and construction.

 

Enjoy the weekend

Lee

Supporting SMEs to meet housing targets

As I sit in a hotel room in Madrid waiting for the main event to start at the annual PwC Real Estate Conference I reflect on conversations last night with clients and colleagues. Has the market reached its peak?

So has it happened? Has the market reached a peak, well following the ONS revealing the first quarterly output drop in two years you can’t be blamed for thinking so. This has also led to a downgrade by the Construction Products Association. Despite all of this though there is still suggestions that growth will occur over the next two years.

In context you need to look at the numbers. Output is expected to be around £32.3bn compared with £33bn for six consecutive quarters prior to the downturn. In the grand scheme of things that is not a significant variance and do we really want to be up at the same levels as they were in 2007 considering what then happened in 2008.

As previously discussed, there are other reasons for the decline. The cost of construction has increased and continues to rise leading to developers postponing certain developments. There is also a downturn in housing production following the general election, or put another way the levels didn’t return post-election. Okay, I accept that but housing is a strong requirement and strongly supported throughout the industry so it will return as noted by research from Shelter which highlighted only one in six properties for sale were affordable for families with children on a set day, a number which fell to one in 13 for single people for London.

Housing completions have recovered from the troughs recorded during the slump, with last year seeing the steepest increase in output for 40 years, but still just 145,000 homes starting on site. Now you won’t get big private developers to massively increase volumes because they are pushing against financial and organisational limits.

So how do you increase this housing output – well you need to tackle two key areas:

• Planning remains an apparent hurdle to increasing the delivery of more homes. Though interestingly if you speak to local government they deny this to an extent and compare it to the number of planning applications which are granted year on year versus the number of housing completions and there is a big gap. Herein is the point that planning applications can be for a number of years. The proposals outlined in the Housing Bill do not do enough to ease this – they are trying to rush through applications rather than investing in processes to allow more to be processed correctly alongside each other.
• Supply Chain is an issue. There is a shortage of key skilled labour and key supplies needed in the construction industry – so can the supply chain really meet the demand of fulfilling 200,000 plus homes a year. Well there has been a significant increase in apprentices in recent years which will help longer term but significant under investment during the recession has created a gap. So achieve the targets there needs to be significant proactive investment – which won’t happen overnight.

Housing has remained at the centre of the political world for a while now. In 2014-15, there were only 124,520 housing completions, around 100,000 short of what is needed to meet current demand. The quiet decline of the smaller housebuilder has had a significant effect on the country’s building capabilities. The last time the number of homes being completed in England was in excess of 200,000 a year was in 1988, a year in which two-thirds of new units were completed by local builders.


To me, as previously said, the key is to improve access to SME firms and support this with clear government policy. The terms they are offered need to be comparable to the rest of the market. The government should use the resources available to it, for example providing loans to SMEs out of the Help to Buy pot (after ofcourse it was increased). Living in a small village myself there is too much focus on high volume sights which generally are rejected by the village. The local authority should look at smaller sites for SMEs and focus on these in planning. The problems are fixable but they need support and focus from everyone, led by government policy.

 

Feel free to contact me 0113 288 2276 or lee.a.wilkinson@uk.pwc.com if you wish to discuss this blog or anything relevant to property and construction.

 

Enjoy the weekend

Lee

Help to Buy ISA scheme - the ins and out

On 1 December 2015 the next assault on the housing market commences with the launch of the Help to Buy ISA scheme, basically the Government will give you a cash boost towards buying your first home if you save into a new type of ISA. How exciting. Under the scheme you save up to £200 a month and the Government add 25% on top – so if you save the full amount you get a further £50 – and in your first month you could save up to £1,200 therefore getting a bonus of £300. Compared to your average ISA you certainly are getting a bonus!







For once I like the plan, it should work and give first time buyers a good boost in life but in reality, with the maximum being £3,000 from the Government (therefore £12,000 from you!) it’s hardly going to cover all the first deposit so it provides some relief but doesn’t go the extra way to help reach the deposit levels required. However looking at it a different way, you are effectively getting your tax back on the money you put into savings, so that is a real incentive and surely as a couple you could both do it therefore giving you a rather chunky amount to put towards that first house.







But taking a step back why is the above needed? Well because first time buyers can’t afford the deposit! Interesting that at the same time the listed housebuilders continue to report a strong year with the residential house building sector outperforming equities in other sectors for Q3 2015. Building carried out research which shows the sector rose 3% in Q3 and 59% year on year – imagine investing in that! Certainly would help towards the deposit for a first time buyer.

  

There is however no point in pointing the finger, after all they are businesses that have to answer to their shareholders. The shareholders are likely to include your pension fund so it’s in your interest that their performance continues. In truth it’s one big circle! Since the lows of 2008 the share price has grown exponentially with the housebuilders now worth around £30bn – they do contribute a lot to the economy though from an employment perspective (which therefore means taxes!). The average housebuilder builds around 7,000 units a year and has a landbank to see them through a good few years – that is a good strong economical thumbs up for job security of thousands.

Feel free to contact me 0113 288 2276 or lee.a.wilkinson@uk.pwc.com if you wish to discuss this blog or anything relevant to property and construction.

Enjoy the weekend

Lee