Market trends – Property
- Since 2014, the proportion of those owning a home, renting or in social housing has remained very similar¹.
- Government policies to attract first-time-buyers (FTBs) seem to be working. In 2019, FTBs, the lifeblood of the buying and selling, reached 353,4362, its highest since 2007.
- Also, since 2014 the proportion of 25–34 year olds in owner occupation increased from 36% to 41% and there are now almost equal proportions of this age group living in the private rented and owner occupied sectors1.
- Between 2018 and 2028, the demand for property is still forecast to rise at a pace, with the ONS3 estimating that the UK population will grow by 3 million people to 69.4 million in mid-2028.
The growth in FTBs is good news for the sales market, as it fuels the rest of the home buying and selling market. With Help to Buy being restricted to FTBs from April 2021 and ending in March 2023, this could impact on FTB growth. However, the Government4 has proposed a minimum “discounted in perpetuity” of 30% for new homes which is currently under consultation.
We are encouraging and training our Belvoir franchisees who traditionally have been more geared towards lettings to gain skills in property sales so that they can benefit from trends in both markets.
- Although UK house building has increased in recent years5, when compared against the growth in population6, we are still struggling to overcome the past and existing supply deficit.
- There are only 152,0717 Build To Rent homes now under planning, under construction or completed. These are mostly centred around London and key regional cities and tend to be high density housing.
- Supply is expected to continue to tighten, helping to support the value of homes and rents into the future.
- PwC forecast8 that the market will “push real house price growth back up towards its long-term average rate” of around 3%.
The property market is fundamentally supported by an overall lack of supply versus demand. This, coupled with current low-cost financing and a strong labour market, has led to the market remaining active, despite the uncertainty around Brexit and an economic slowdown towards the end of 2019. Until supply is increased to meet demand, there will be continued upward pressure on both rents and house prices. From a regional perspective, house price growth outside of London is expected to grow by the most in areas such as the Midlands, North and Scotland where the Belvoir Group has a stronger presence.
- Although rental growth10 is at its highest for two years, earnings11 are, in the main, rising at a faster rate.
- On average, outside of London, tenants are paying just over 30% of their earnings on rent which is considered “affordable”.
- Given higher earnings growth and the relatively stable nature of renter affordability, there is scope for further rent increases in the coming year.
- FTB mortgage payments as a percentage of mean take home pay are at 31.2%9, one of the lowest figures since 2003.
Although affordability is undoubtedly an issue in some areas across the country, in many of the areas where the Belvoir Group operate, low-cost financing is helping to ensure those who can raise a deposit are actually being able to afford ongoing home costs more easily.
- In 2019 the number of BTL mortgage advances12 suggested that the decline in new BTL investors was slowing, with BTL yields increasing.
- Whilst Government policies to dissuade new BTL investors from entering the market may have stopped a proportional rise in the rental sector, they do not appear to have resulted in a decline in the number of rental properties.
- Prior to recent events, BTL purchase volumes were holding up in housing markets with lower house prices and higher yields where the impact of the tax and regulatory changes is less pronounced.
According to our own rental survey of Belvoir agents, average annual rents rose in 2019 by one of their highest: 4.0% higher year-on-year; and compared to the last four years, fewer offices are reporting landlords selling up.
It had been expected that wages would to continue to outperform inflation in 202013 and that rising rental demand versus a shortage of supply would see rents continue to rise in 2020. This had the potential for higher yields making BTL more attractive to existing and new potential landlords.
It is too early to determine how Covid-19 will impact on this given the different dynamics involved.
- The property industry is going through a change in the way that we let and sell homes.
- Online agents market share has become static at around 7.9%14 of house sales over the past two years, with a number of noticeable online estate agency failures as online agents struggle to prove that they have a viable business model.
- There is a plethora of new “prop tech” companies offering a range of new tools to reduce the administration and costs of operating a property management service.
The Belvoir Group is investing in technology to stay ahead of the competition. We are currently half-way through the roll out of a new technology platform to our franchisees which provides both back-office efficiencies and improved customer experience. This is aimed at giving a first class online customer experience, whilst continuing to benefit from the advantage of offering a personal service delivered from fully staffed local offices.
- In recent years the sector has faced new legislation, sometimes at short notice. 2019 saw the introduction of client money protection on 1 April and the ban on tenant fees on 1 June in England.
- Electrical safety checks, minimum energy efficiency standards (MEES), the introduction of a new lifetime deposit for tenants and the loss of Section 21 in England are all potential changes on the horizon.
- The pressure of such changes is contributing to the ongoing consolidation in the sector, with the number of UK estate agency branches down 14315 in H1 2019.
Belvoir is used to accommodating new legislation and regulation and we welcome such changes as they tend to result in opportunities for the Group. The potential loss of Section 21 is likely to have minimal impact on our landlords, as our four year-long survey of Belvoir letting agents shows that each quarter, 75% of offices or more carried out either no evictions or less than one. This reflects the strength of our tenant referencing and regular auditing of our offices to ensure compliance with legislation, government regulation and our own high standards of conduct.
For many years we, along with other industry professionals, have championed agents being regulated so everyone in the industry works to a minimum, professional standard and consumers are given the protection they deserve.
The new model proposed is for an independent property agent regulator which provides a system of license to practise and a single, mandatory and legally enforceable Code of Practice for property agents. Agents, new and existing, will need to have minimum qualifications and invest in continued professional development. Enforcement is expected to be carried by the new regulator.16 Belvoir sees this as an enormous opportunity for its franchisees.
There will, however, be many small independent agents who do not have the resources or desire to take qualifications to do a job they have carried out for many years and they are likely to either close their agency doors or sell, leaving further opportunities for the Belvoir Group to expand and grow through acquisition.
In the future, it is recommended this legislation should allow for a change in the definition of a property agent to potentially include DIY landlords, freeholders and developers, paving the way for further growth opportunities from which RoPA compliant companies will benefit.
Market trends – Financial services
- First time buyer (FTB) numbers have recovered to 2007 levels, driven by a demographic bulge in the number of 25–34 year olds17, the help-to-buy equity loan scheme and support from the ‘bank of mum and dad’. FTBs make up 36% of house sales and 50%18 of mortgages, with Help to Buy equity loans accounting for 14% of all FTB purchases.
- Older homeowners are also fuelling demand with the over 70s increasingly opting for lifetime mortgages. Given the high level of housing equity of older homeowners, the lifetime lending market is expected to grow.
- The impact of the additional 3% stamp duty from April 2016 and the loss of mortgage interest tax relief from April 2017 on demand for BTL mortgages appears to have tailed off. Growth in outstanding BTL debt of around 4%19 suggests a degree of stability in the BTL market.
The reliance on intermediaries, such as Brook, has grown significantly in recent years and intermediaries now account for 75% of the residential mortgage market up from 50% in 2009-2012, with 90% of BTL business, 80% of FTB business and 60% of the product transfer market going through an intermediary.
- Remortgage activity has been strong in recent years reflecting the low interest rates available, increased competition for mortgage business, increase in housing equity and refinancing by landlords looking to offset some of the negative cashflow impacts of the loss of mortgage tax relief.
- Meanwhile remortgage activity to fund equity release remains historically low at £12.3 billion in 2019.
- 70% of mortgage balances are on a fixed rate, with two year deals being overtaken by five-year deals in the past year or so. This shift reflects the continual narrowing of the relative pricing since 2014 and could lead to a weaker remortgage market in the next two to three years.
Brook proactively contacts our clients as their mortgage is approaching renewal so as to give them the best whole of market advice on their next mortgage.
The growth in the Brook client base over the past two years means that the drop in frequency of remortgages will be compensated by the larger client base with which we are working.
- Since 2014 new regulations have been introduced to limit the level of borrowing through the introduction of an affordability test, a cap on high-income multiples loans, underwriting restrictions on BTL lending and extra restrictions on specialist products including later life lending.
- Loan to income (LTIs) multiples have been increasing with mortgages at or above 4x income accounting for close to 30% of new lending.
- Meanwhile loan to value (LTVs) rates have also recovered, linked to the stronger FTB market, although still with limited availability of mortgages with LTVs greater than 95%.
Brook operates as an Authorised Representative of Mortgage Advice Bureau, an AIM-listed company, and operates under their strict compliance regime. All advisers are subject to in-depth initial training and ongoing professional development to ensure that our clients are offered mortgage products to match their needs and affordability.