We see 2018 being a year of correction as different sectors of the market and regions of the country come to terms with tougher taxation and mortgage regulation, rising interest rates and political instability. But as always, change brings opportunity.
The smaller buy to let investor may seek to disinvest as a combination of interest rate rises and tapering tax relief on investment income diminishes net returns. This could result in an increase in the flow of vacant single units and assured shorthold tenancy investments to the auction room. Reserve prices will need to take account of the impact of the 3% stamp duty (SDLT) surcharge applicable to investments and second homes. Investor bidders will also find the availability of finance more restricted following the introduction by the Bank of England of portfolio loan stress testing. Home buyers will also be challenged by stricter lending criteria and the need for substantial deposits. Of course the Government’s Help to Buy scheme will help ease transactions in the new homes sector. The Bank of Mum and Dad will come to the rescue in the second hand market. All this points to one thing – in 2018, cash will be king.
Most commentators accept that London prices will on average remain static this year. But break this down to postcodes within the M25 and there is likely to be a great deal of variance. The prime central London market has been hit by uncertainty over Brexit and a general loss of confidence. Further falls, particularly in the value ranges above £5m, will be likely. The suburbs and the Home Counties will show steady growth in 2018 as London buyers look for more space for their money. As forecast last year, the regional cities will continue to offer higher yields and better prospects for capital growth.
The new build market will be one to watch. There have been warning signs appearing in this sector. Oversupply is apparent in parts of London, Nine Elms being one of the most notable. Help to Buy is supporting disposal programmes and sales prices to a degree. But in the absence of underlying economic growth and low unemployment, this situation may not be sustainable. Some developers will offer ever more creative incentives and eventually price reductions this year. New build house prices in the principal regional cities will continue to rise during the first half of 2018 but the potential risk of oversupply here too should not be ignored. Institutional interest will pick up but discounts will be expected for bulk purchases.
Smaller scale residential development opportunities, with and without planning permission, are likely to feature in the auction rooms this year. In September last year, the Government published a consultation paper setting out proposals to reform the planning system and increase the supply of new homes. This should encourage the sale of land to release value, particularly in areas of greater housing need and more limited affordability.
In previous years we have noted the stability of the regulated tenancy investment and ground rent markets. We see this lack of volatility continuing for regulated investments. These are in diminishing supply and demand from the specialist investors remains keen.
The ground rent market is set to change. It is proposed that payments on newly established leases of houses and flats will be set at a peppercorn. The value of such freeholds as investable assets will diminish considerably. It is unlikely that legislation will affect existing contractual ground rent commitments, through retrospective legislation for example. The proposal for capping enfranchisement prices to ten years purchase – particularly for existing leases – is of less concern. We are unlikely to see the full process of leasehold reform concluded before 2020. In the meantime, present day concerns over future changes may affect the immediate market for ground rents and consequently some impact on values is possible.
2018 will not be without its challenges. But the purchasing opportunities presented across the market will be interesting. The Allsop auction team will, as always, be endeavouring to ensure that pricing is realistic. We look forward to welcoming your participation in our sales during the year ahead.