Marsh & Parsons London Property Market Overview - June 2010
Sun 01 Aug 2010
The Central London residential property market has enjoyed a strong performance during the first half of 2010. A combination of buoyant demand and limited supply particularly in the opening quarter led to strong price inflation in the established housing market with price growth of approximately 4.8% recorded in the first six months alone.
As summer approaches there is emerging evidence of a seasonal slowdown in demand which when coupled with an increase in available stock is resulting in stabilisation in pricing.
As we progress into autumn, the market is forecast to exhibit resilient transaction activity in a more stable pricing environment.
The performance of the London economy remains favourable with the latest forecasts published by GLA Economics reveal that Londons growth rate, measured in terms of Gross Value Added, is predicted to rise to 1% in 2010, strengthening to 2.8% in 2011 and 3.3% in 2012. These figures remain positive when compared to forecasts for the UK economy published by the Office for Budget Responsibility of 1.2% for 2010 and 2.3% for 2011, rising to 2.7% and 2.9% in 2012 and 2013 respectively.
Continued signs of improvement in the London economy are highlighted by the results of the PMI of business activity for the London region published in the GLA Economics report Londons Economy Today. The index stood at 56.4 points in May compared to 57.2 points in April. Any figure above 50 denotes an improvement in activity compared to the previous month.
The annual rate of inflation as measured by the Consumer Price Index eased to 3.4% in May, down from 3.7% the previous month. Although inflation has remained well above the target rate of 2% since December 2009, the Bank of England has indicated that the rate is expected to ease as a result of spare capacity in the economy. As such, interest rates remained unchanged at 0.5%.
The overall economy has begun the process of correction with the announcement of the emergency budget on the 22nd June in which Chancellor George Osborne outlined plans by the new coalition government to tackle the budget deficit. The measures outlined included a new tax on banks, an increase in the VAT rate to 20%, freezing the higher income tax threshold for three years, and freezing pay for public sector workers earning over 21,000 for two years.
The capital gains tax rate was also increased to 28%, with immediate effect. On a positive note, this is significantly lower than the 40% 50% rate previously expected while the annual CGT free allowance remained unchanged which will help reduce the CGT burden. In addition, the immediate implementation will prevent any distortions to the property market.
Central London Market
The strong market activity exhibited in the opening quarter of the year continued into quarter two in the Central London Market. This is best reflected by the continuation of an inflationary market with prices rising by 1% in the second quarter, bringing total inflation in the year to date to 4.8% according to the Marsh & Parsons Central London Index.
As a result, prices in many locations have returned to the peak levels recorded in 2007.
That said, the pace of inflation has eased in recent months following the very robust growth levels achieved in the opening quarter. This perhaps reflects the sense of uncertainty in the market during the build up to the election and the subsequent emergency budget, as well as the impact of rising supply levels.
Price increases varied considerably across location, with Fulham recording the strongest growth during the first half of the year at 12.8%. This was followed by Battersea which recorded capital growth of 9.9% during the period, and Balham with growth of 8%.
Financing Postion, Q2 2010
Cash buyers remain a significant component of the Central London property market accounting for almost 43% of properties traded during quarter two. This is compared to 36% in the previous three month period. If one was to look at central London independently, this figure rises to over 65%.
On the supply side, figures from Marsh & Parsons reveal that stock levels continued their upward trend in June rising by 7% from the previous month. The level of properties available for sale, including those under offer, is now 35% greater than a year earlier. This has helped ease shortages in the market subsequently easing pressure on prices.
Looking at the wider market, the latest figures from the Land Registry reveal that the London market continued to outperform England and Wales during May with average prices rising by 0.7% during the month. On an annual basis, average prices in London rose by 14.2% in May, the highest annual rate recorded since November 2007. This brings the average property price in London to 338,708 close to levels seen towards the middle of 2008, indicating that prices have recovered much of the losses seen during 2009. This is compared to a monthly decrease of 0.2% recorded for England and Wales and an annual increase of 8.2%.
A breakdown by London borough reveals that the largest annual increase recorded during May was in Kensington and Chelsea at 21.2%. This was closely followed by Hackney at 20% and Hammersmith and Fulham at 19.9%. Barking and Dagenham and Newham witnessed the smallest annual increases during the month at 4.5%. The largest monthly increase was recorded in Southwark at 2% followed by Brent and Newham with increases of 1.4% and 1.3% respectively. A number of areas witnessed decreases during the month including Camden, Lewisham and Merton where average prices declined by 0.8%.
The Marsh & Parsons Sentiment Barometer is a monthly barometer which assesses current market conditions and compares them to those in the previous month and previous year.
The barometer assesses key market indicators including buyer levels, viewing levels, demand from all cohorts of purchasers and stock levels. In doing so it provides an up to date view on market performance and is a very useful tool in assessing future market trends.
The latest results from the Sentiment Barometer reveal an interesting trend. Both demand and supply levels recorded in July 2010 exceed the levels of 12 months ago.
A review of demand factors in July 2010 compared to July 2009 reveals that first time buyers, parties trading up, investors and overseas purchasers are all recording stronger levels of demand in July 2010 than twelve months ago. This perhaps reflects improved conditions in the mortgage market and greater choice as a result of increased stock levels.
That said, there is evidence of the normal seasonal slowdown in activity, in particular first time buyer and trading up demand were both recording a reduction in activity in July when compared to June 2010. This is also reflected by the fact that the majority of respondents indicated that both applicant and viewing levels have begun to ease off in July when compared to June levels.
Furthermore the proportion of respondents reporting a decline in demand from overseas buyers compared to a month ago and a year ago exceeded those reporting an increase. This may reflect the strength of Sterling relative to the Euro in recent months.
Interestingly, overall investor demand strengthened in July compared to the previous month. This is partly due to greater value available in some locations as a result of stronger supply levels. That said, a small number of locations have reported a decline in investor activity as a result of stronger prices.
However, improved demand for rental accommodation should strengthen confidence levels among investors going forward. Marsh & Parsons figures reveal that demand at the upper end of the rental market is very robust in Central London with properties being let for in excess of 1,000 per week 53% ahead of a year ago. Furthermore, average budgets spent on accommodation have increased
by 17% on 2009 levels, while lease lengths also increased to 20 months compared to 17 months in 2009.
A review of stock levels reveals that the majority of respondents reported an increase in stock levels compared to a year ago. Similarly, the proportion of respondents signifying that stock levels had increased compared to June levels exceeded those reporting a decrease. This rise in supply levels reflects a surge in properties placed on the market amid concerns that the new government would announce a hike in capital gains tax to 40 or 50% to be implemented in 2011. The abolition of HI Ps has also positively impacted supply.
The view of the year ahead remains positive, with the majority of respondents purporting a positive or somewhat positive outlook. That said the trend is somewhat less optimistic than it was in June perhaps reflecting some seasonality factors and emerging economic realities.
Once again a review of the wider market reveals that the latest RICS Housing Market Survey for the UK revealed positive growth in house prices during May with the net balance reaching +22 compared to +19 in April. This indicates that 22% more surveyors reported an increase in prices than those reporting a fall. According to the report, London and the South East continue to outperform the rest of the UK in terms of price inflation. There was also an improvement in the level of new enquiries to reach +10 from +9 the previous month. The most significant change during the month was the rise in the level of new instructions to reach +21 from +11 in April. This reflects the impact of the abolition of HI Ps. Subsequently, the sales outlook net balance also increased to +31 from +27 in April. However the price expectations net balance moderated to +5 in May from +7 the previous month.
The latest available transaction figures published by the Land Registry reveal that the volume of sales in the London region totalled 6,850 units in March. This represents an increase of approximately 74% on the same month in 2009. That said, monthly transactions levels have eased somewhat compared to levels seen towards the second half of 2009. It is important to note that sales volumes in the London region are relatively low and are therefore subject to volatility.
Latest figures published by the Bank of England reveal that gross mortgage lending by the major UK lenders increased in May to reach 10.2-billion. This is compared to 9-billion the previous month and is 16% greater than in May 2009. The improvement during the month reflects increases in both mortgage lending for house purchase and remortgaging activity. In particular, mortgage lending for house purchase stood at 6-billion in May, the highest level recorded so far this year. The level of remortgaging rose to 3.3-billion during the month, compared to 2.8-billion in April. That said, this remains very low by historical standards.
Interestingly, on a cumulative basis, mortgage lending for house purchase in the first five months of the year is now 46% ahead of the same period in 2009, highlighting the improved market conditions in recent months.
The level of mortgage approvals also improved in May according to major UK lenders figures to reach 51,000, compared to 48,000 the previous month. This represents a 9% increase on May 2009.
Since the beginning of the year, the UK property market faced a series of challenges including the severe weather conditions at the start of the year, uncertainty over the election results and subsequent emergency budget, and the escalating budget deficit coupled with the tax measures required to bring it under control. Despite these, the Central London market remained resilient with very strong growth in average prices since the beginning of the year. In particular, prices in many areas are back to levels seen
in 2007 when the market was at a peak.
More recently the market has begun to stabilise as supply levels have improved and demand appears to have eased somewhat for the summer period. During the remainder of the year, the market is expected to remain stable now that uncertainty over the election results and the emergency budget has been removed.
The outlook for interest rates for the year ahead remains positive, with the base rate expected to remain at its current historical low of 0.5% until early 2011. This bodes well for affordability levels in the property market.