In 2014 the total value of housing stock in the United Kingdom rose by £543bn to a whopping £5.75 trillion, a sum equivalent to the combined Gross Domestic Product of Germany, France and Italy. However impressive (or frightening) this statistic, it hides the fact that 2014 was a year of two halves: a first half of sentiment-fuelled price growth, the second a period of regulation-induced sobriety.
Nowhere was this more evident than in London, where the value of housing stock has doubled in a decade so that it now accounts for a quarter of the total value of housing stock across the UK. That means the gap between values in London and the rest of the country has reached an unprecedented level, leaving London looking expensive.
Lead indicators of demand, though, such as the number of mortgage approvals and the change in new buyer enquiries, indicate that price growth will be muted in 2015, with the real possibility of prices softening in parts of the capital.
While fickle market sentiment is partly behind this, the recent introduction of mortgage regulations is likely to have a more fundamental and longer-term impact. By stress testing borrowers’ affordability and introducing loan-to-income caps at a lender level, these regulations will effectively put a ceiling on the number of people able to get a mortgage and the size of mortgage available to those who can.
In due course, the impact of these regulations will dwarf any effect from the changes to stamp duty introduced in the autumn statement, however welcome (and overdue) they may have been.
This is likely to mean that the “new normal” for transactions in the housing market will be some way below the long-term pre-credit crunch average and will continue to be skewed in favour of cash buyers and those with a healthy chunk of existing equity.
In the past seven years market forces have driven this change. Going forward, the regulation is likely to mean it becomes entrenched. Arguably these regulations are a case of shutting the stable door seven years after the horse has bolted. Nonetheless, together with the prospect of higher interest rates over the medium term, they are likely to act as a drag on house price growth at a national level, making it much more dependent on improved earnings.
At Savills we are forecasting average house price growth across the UK of just 2 per cent in 2015, with no growth anticipated in London. Over five years the average UK house price growth is expected to be almost double that seen across the capital, at just shy of 20 per cent.
While this may not particularly excite investors and homeowners it should limit the prospect of debt-driven parts of the market overheating in the future.
It is also likely to mean that access to home ownership remains constrained, causing more people to rent for longer. As such, the generational divide in the housing market is likely to widen. The gap between baby-boomers (who benefited from the growth in home ownership in the second half of the 20th century) and Generation Y (who face 21st century difficulties in getting on the housing ladder) is set to widen.
The corresponding increase in demand for rented accommodation suggests that there will still be investment opportunities for those with the purchasing power to expand their property horizons. This is particularly likely to be the case beyond the capital, where the capacity for medium-term house price growth is greatest.
Even so, we would expect the investment focus for this group to shift away from prospective capital growth and towards the income returns which an investment in housing yields.
Over the past five years, the total value of housing in the private rented sector has grown by 57 per cent to over £1.1 trillion, as first time buyers have struggled to get on the housing ladder and investors have embraced the security of a bricks and mortar investment. Even though patterns of price growth will change in the next five years, all of the indications are that the private rented sector will continue to grow over this period—potentially by as many as 1.2m households.
