HOUSING AND THE ECONOMY SUMMER 2012

Transcription

1 HOUSING AND THE ECONOMY SUMMER 2012

2 CONTACTS Tim Cann Head of Development & Residential Consulting Tel: David Couch North Tel: Peter White South West & Wales Tel: Charles Robinson Midlands Tel: Crispin Topping London Tel: Debbie Taylor New Homes Tel: Anthony Lee Affordable Housing Tel: Claire Higgins Head of Research Tel: BNP Paribas Real Estate UK 5 Aldermanbury Square London EC2V 7BP Housing and the Economy Summer 2012

3 FOREWORD The housing market has drifted sideways for about a year. However, it is clear from the steady rise in rentals that the demand for housing has continued to increase, even through the recession and weak recovery we are now experiencing. Also there are now signs of a rise in mortgage provision and the return of first time buyers even though from a very low base. My expectation has for some time been for a slow recovery of house prices to a modest rate of growth that returns to track the basic trend around 3% for real house prices (i.e. excluding inflation) over three and a half decades. According to the Nationwide index, the two recent quarters have seen prices fall back by around 2% overall. But the other two main indices, LSL and Halifax, show virtually no change over this period. Taking the picture across all the available evidence we are still therefore in a sideways movement. My previous view was to look for gains over this period, reflecting what I saw as the general improvement in the economy. In fact we have had a stalling of growth; and the house market has reflected this. The causes of the stall lie in the Eurozone crisis which became particularly threatening in the Autumn. The uncertainty this created affected most developed economies, preventing firms from investing and consumers from spending. Productivity growth has been weak in the UK as well, creating an unpleasant mix of demand and supply weakness. Economic outlook Looking ahead, I see a brightening outlook. The Eurozone crisis has subsided to an always-with-us simmering mess that UK businesses are being forced to diversify away from. There is no prospect of the crisis being resolved in any foreseeable future: the euro-elite that created this poor institution are in no mood to give way. The ECB has meanwhile produced a palliative for it in the form of huge liquidity injections (1 trillion euros so far) into the euro banking system; this injection was aimed at ensuring bank liquidity (which dried up as worldwide banks feared for the safety of loans to euro banks) but it had the useful side-effect that the banks bought sovereign bonds of southern euro countries. We are therefore witnessing the prolonged battle between the political objectives of the euro-elite and the political objections of the suffering masses in these southern euro countries. It is anyone s guess which way this battle will go. But either way the Eurozone will perform weakly to poorly in growth over the next few years. This weakness is now factored into mine and others expectations. Growth in the world economy nevertheless remains solid, with emerging market countries growing fast still in reflection of their fast productivity growth. Also the US economy is looking a bit stronger, with housing dragging itself out of the doldrums and investment reviving on the back of strong profits growth. UK businesses are able to profit from these markets, given the strong traditional links the UK has across them all; a fundamental orientation of UK trade away from Europe towards these markets is overdue. Moderate growth for housing The implications for housing remain for a moderate growth along the previous trend. Effectively the recession has drained the froth from the market at its peak in late 2007 this froth was, on my calculations, around 20%; furthermore, the trend house price has come down with the collapse in GDP during the crisis. Overall real house prices have fallen about 30% from their peak as a result of these two things and are now close to their long run trend. This adjustment now looks complete. Real house prices from now on should be rising slowly more or less along their long-run trend. They should rise hardly at all this year, and then rise faster, at around 4% (excluding inflation) in succeeding years. As usual the market is being led by London and the South East; and again as usual this southern growth spills over to the rest of the country with a lag. Professor Patrick Minford CBE Cardiff Business School Patrick Minford CBE has been Professor of Economics, Cardiff Business School, Cardiff University since October Between 1967 and 1976 he held economic positions in the Ministry of Finance, Malawi; Directors staff, Courtaulds Limited; H M Treasury; H M Treasury s Delegation to Washington, DC; Manchester University; and The National Institute for Economic and Social Research. From , Patrick Minford was professor of economics at Liverpool University. He was a member of Monopolies and Mergers Commission and one of the H M Treasury s Panel of Forecasters ( Six Wise Men ) He is author of many books and articles on exchange rates, unemployment, housing and macroeconomics. I3I

4 UK OUTLOOK There remain conflicting views on where house prices have moved. According to Nationwide, there was a moderate increase during 2011 of 1.0%, but a change in direction has seen prices fall by -0.8% in the first five months of Meanwhile, Halifax estimated a fall in 2011 of -1.3% but an increase in this year to May of 0.7%. So that s clear, then. As Professor Minford points out in his foreword, it may be best on that evidence to assume that the overall picture has been broadly flat. Meanwhile, as has been well documented, housebuilding has declined dramatically across the country since the start of the economic downturn. In England, prior to 2008 the average number of quarterly starts was in excess of 42,000. Since then, it has dropped by nearly 40% to less than 26,000 per quarter. Of even greater concern is that, after some improvement during 2010 and most of 2011, starts in the two latest quarters have fallen back towards the levels seen in 2009 the lowest point in recent times for housebuilding. As a result of this greatly reduced housing supply, rents have been driven up across the main UK cities. Although new demand to buy houses is still relatively weak because of the low supply of mortgages, new demand to live in houses is growing as always with new household formation and this, in the face of low new supply, is raising rents. House prices in some central locations, and particularly in London, are now responding modestly to the higher rents. Thus we have a market in which few new houses are being built or bought but rents are rising to force growing demand for house space into equality with slow-growing supply. Prices are still overhung and sluggish because of the financial disarray and concerns about the riskiness of the market. Housebuilding starts in England to Q (No. of starts all dwellings) 200, , ,000 50,000 0 Q Q2 Q3 Q4 Source: National Statistics UK house price growth (House Price Index 2000 = 100) 180 UK 160 Prices set to rise following slow 2011 At a regional level, only London, the South East and Eastern regions have shown some resilience; elsewhere the market has been weak. The strongest market has again been London, which is the only UK region to have seen average prices recover to pre-recessionary levels. We estimate London saw an increase of 2.7% in 2011, and the South East and East of 0.7% and 0.2% respectively, while all other UK regions saw house prices fall on average during the year. We forecast a moderate rise in prices during 2012, with stronger growth to follow throughout the subsequent four years. Prices are currently still fairly flat while economic growth will be moderate at best and unemployment will remain fairly high in the near term, impacting upon the growth in house demand. On the other hand, the very low yields on alternative assets means that rising rents will gradually drive prices up sufficiently to bring housing yields down into line, while a market imbalance between supply and demand is likely to grow as confidence and liquidity return, also putting pressure on pricing For 2012 as a whole, we anticipate very moderate growth in average UK house prices of 2.1% but the ensuing rebound will mean that, over the five year forecast period to 2016, average annual growth of 6.0% is expected. Housing and the Economy Summer 2012

5 The North/South divide will broaden Continuing the theme that has persisted throughout the downturn to date, there will still be significant regional variances going forward. The following chart demonstrates sharp regional differences, setting average annual price changes in the last five years against our forecasts for the coming five years. In all cases, the most notable difference is the rate of growth in each period, with the historic UK average just 0.1% while the forecast is for price growth of 6.0%, highlighting the impact of price falls during 2008 and the anticipated recovery in 2013 and beyond. Clustered to the bottom left are the northern regions of the North East, Yorkshire and North West, where historic falling house prices are matched by comparatively moderate forecast growth of between 4% and 5%. The East and West Midlands are similarly clustered on past performance, albeit the former is set to perform slightly better in the coming period, with growth of 6.6% p.a. versus 5.2% in the West Midlands. Wales is the outlier in terms of forecast performance, with a more muted but still healthy 2.8% p.a. forecast in the period to By sharp contrast, all the southern regions are spaced centrally or towards the top right, reflecting a combination of stronger historic growth and forecast price rises. The Eastern and South West regions combine virtually flat pricing in the past (in line with the UK average) and forecast growth of 6.2% and 6.3% respectively. The South East experienced similarly moderate annual growth of 0.2% between 2006 and 2011 but is forecast to see more substantial growth of 7.1% p.a. going forwards. The outperformer among the regions is of course London, which experienced the fastest rate of growth in the period to 2011, of 0.6% p.a., and is similarly expected to outperform in the period to 2016 with annual price growth of an impressive 8.0%. Key points An ongoing housing supply shortage will drive rental growth in core city locations, underpinning house prices and preventing decline as the UK economy struggles to return to form Nonetheless, the increase in UK average house prices will be fairly muted in the near term, but a recovery in the economic backdrop and employment market should be sufficiently healthy to produce more robust growth throughout the rest of the period The North/South divide will broaden, and the southern regions will continue to outperform the rest of the UK, particularly in London and the South East where the economic outlook is stronger even in the near term Table 1: Annual average growth in house prices to 2016 UK % % % % % % % % % % (inc.) annualised 6.0% Regional variation in house price growth Forecast price growth North East Yorkshire North West East Mids West Mids London Eastern South East South West Wales UK 10% 8% 6% 4% 2% 0% -0.6% -0.4% -0.2% 0.0% 0.2% 0.4% 0.6% 0.8% 1.0% Historic price growth I5I

6 LONDON House prices As might be expected, London has been the top performing UK region in terms of house price growth over the last 5 years However, given the incorporation of the economic and subsequent residential downturn in that period, this isn t saying much Despite being one of only four regions in England and Wales to see positive growth, London produced an annual average increase in house prices of just 0.7% during inclusive, set against a national growth rate of less than 0.1% p.a. London s relative outperformance is expected to continue throughout the next 5 years, but on a much grander scale, and in the period to 2016 London is forecast to see house prices increase by a more resilient 8.0% p.a. This strong growth, aided by the performance of the other southern regions, pushes the UK forecast up to 6.0%, and far outstrips many other areas exacerbating the much-vaunted North/South divide In all, in the decade to 2016, London s house prices will have increased cumulatively by an impressive 52% Current housing market issues The exact impact of Local Authority Community Infrastructure Levy (CIL), mayoral CIL, and residual S106 obligations/costs is still uncertain and as a result may affect viability and consequently land value The cost and time involved in achieving planning consents seems to be increasing following the uncertainty imposed on Local Authorities by the changes to the planning regime Development finance is still very restricted, imposing a risk averse approach to residential development generally, even in London Drivers of change External shocks, such as last year s Arab Spring and the neverending Eurozone crisis, are causing unnatural levels of investment in Central London stock Government moves to cap housing benefit at 24,000 p.a. are expected to lead to the large-scale relocation of families from central to outer boroughs, or even to outside London HCA funding has to be spent by the end of March 2015 or will be lost. This has led a number of Housing Associations to enter the land market very aggressively and outbid all comers Outlook Prime Central London price growth will have to moderate after increases of up to 500% since 2000 in some super prime locations There will be a continued move to lower density housing in the outer London boroughs and indeed across the wider South East region We expect to see a slow growth in private build-to-rent schemes Forecast house price growth London (House Price Index 2000 = 100) London Table 2: Annual average growth in house prices to 2016 London % % % % % % % % % % (inc.) annualised 8.0% Key points London is performing differently to the other UK regions, bar perhaps the South East, both economically and in terms of its residential market Underpinned by a stronger rental market and demand for medium/upper market properties, average growth across the region as a whole will be far healthier than elsewhere in the UK in the coming period Housing and the Economy Summer 2012

7 SOUTH EAST & EAST House prices Outside of London, the South East has been the best performing region in terms of house price growth over the last five years, with the Eastern region not far behind As stated elsewhere, however, this growth has still been negligible, with the South East producing annual growth of 0.1% and the East of 0.0% since 2006 Looking ahead, the South East will continue see the strongest growth in house prices outside London Our forecast indicates growth of 7.1% p.a. to 2016, and of 6.2% in the East, both outperforming the UK average of 6.0% p.a. This strong growth combined with the previous stable performance means prices will have increased by 41% over the 10 years to 2016 in the South East behind London s price growth of 52%, but well ahead of the national average of 31% The Eastern region is expected to see growth of 34% in the same period Current housing market issues Traditional locations such as Chichester and Winchester continue to prove popular with purchasers, and links to London are more important than ever. Secondary locations have also been successful with purchasers keen to capitalise on lower prices. However in general terms there is a lack of supply of properties, both new build and existing stock, and the number of transactions is down Housebuilders are active, with some nationals returning for the first time since the crash. There is competition for traditional house sites and even a cautious return of new build flats within more prominent locations. However, this is very much recovery in progress, with a number of schemes still proving to be unviable and therefore mothballed Commercial landlords, struggling to let space, are targeting residential conversion as a means to boost value Drivers of change Landowners will need to adjust their price expectations to take into account the rising costs of development imposed by the code for sustainable homes, CIL and increased affordable housing requirements If the Government revises its policy on vacant rates, commercial landlords may reassess any intentions for residential conversion The appetite of Local Authorities to support housing targets will be critical. While some embrace their new powers, others obviously do not with Winchester at Barton Farm a key example Outlook Government backed schemes and an easing of mortgage finance will boost demand, but continued economic uncertainty will frustrate the market and ensure that confidence, both of consumers and of housebuilders, will not return in full until later in the period Housebuilders are focused on restoring a volume market and achieving consistent sales rates, increasing competition for prime and secondary locations, but while housebuilders remain risk averse in order to generate unit numbers they may need to consider secondary and tertiary locations, providing they can negotiate payment terms to minimise their exposure Forecast house price growth South East & East (House Price Index 2000 = 100) South East East Table 3: Annual average growth in house prices to 2016 South East East % 1.4% % -4.4% % 1.1% % 0.9% % 0.2% % 3.7% % 5.7% % 7.8% % 7.4% % 6.5% (inc.) annualised 7.1% 6.2% Key points Even in these comparatively economically strong regions, the house price to earnings ratio remains above the long run average With strong price growth forecast for 2013 and beyond, this position may be exacerbated going forward I7I

8 SOUTH WEST & WALES House prices The South West was among the strongest performing UK regions in terms of price growth over the five years to 2011, although this still meant a fairly muted performance of only 0.1% growth p.a. Wales, in contrast, saw prices decline slightly by -0.3% p.a. over the same period, albeit that this was a better outturn than that of the North West or Yorkshire This divergence in performance is anticipated to continue, with the gulf between the two regions, on average, growing wider The South West is forecast to perform strongly, with annual growth during the coming period to 2016 of 6.3% and making it the 4th best performing region of the ten within England and Wales, while Wales will produce positive growth but by a lesser 2.8% p.a. This means the South West will see overall price growth between inclusive of 34% compared to just 11% in Wales Current housing market issues Affordability is a significant problem in rural parts of the South West. Around a third of the population lives in small market towns or villages the highest proportion of any region but local families and young people are increasingly unable to buy where the average rural home costs around 13 times the average local income Local housing markets across South Wales have been particularly hard hit as lower demand and a lack of government assistance for buys has curtailed sales rates, albeit Cardiff now finds itself with an apparent shortage of readily developable land for family housing as it awaits progress on its Local Development Plan Development volumes have bounced back sharply in the stronger markets, such as Cornwall and along the M4 corridor Drivers of change The National Planning Policy Framework (NPPF) calls for a significant boost to housing supply and, while it has been met with mixed reviews, the provision of annually updated lists of developable sites should ensure that housing needs are properly accounted for The arrival of new competitors within the development land market in the South West is interesting, in the form of major foreign contractors with new housebuilding models, and we believe we will see more of this activity Outlook The demand for larger sites which has re-emerged in both regions, such as at Keynsham and at Emersons Green in Bristol, is set to continue as the main housebuilders take a more cautious approach and seek sites which can offer steady turnover over a number of development phases, higher average sales rates and less risk of profit erosion With the caveat that the Eurozone does not collapse, the land buying drive will continue as housebuilders seek to push as much unimpaired land through the P&L as quickly as possible to enable margin recovery Forecast house price growth South West & Wales (House Price Index 2000 = 100) South West Wales Table 4: Annual average growth in house prices to 2016 South West Wales % 1.1% % -3.2% % -0.1% % -0.5% % -0.5% % -5.6% % 1.2% % 5.8% % 6.8% % 6.2% (inc.) annualised 6.3% 2.8% Key points The housebuilders will increasingly focus on sites in better locations across the region, as indicated by the existing examples of the former Allt Yr Yn campus in Newport and the Lower School site in Cowbridge The South West will continue to see healthy price growth while house prices in Wales, beyond its core locations which will perform more strongly, will be more muted Housing and the Economy Summer 2012

9 MIDLANDS House prices Both Midlands regions were mid-table in terms of house price change in the last five years, albeit that both saw very marginal declines in pricing over the period The West Midlands produced average annual growth of -0.2% and the East Midlands of -0.3% during inclusive Looking ahead, a greater disparity in performance is anticipated The East Midlands is forecast to see house prices increase by 6.6% p.a. in the period to 2016, ranking it 3rd out of the 10 regions within England and Wales, behind only London and the South East The West Midlands, however, is anticipated to see slightly more modest growth of 5.2% p.a. In the ten years to 2016, house prices will have grown by a cumulative 34% in the East Midlands and by 25% in the West, in comparison to a national average of 31% Current housing market issues The principal restraint to growth in the Midlands, as elsewhere in the UK, is the lack of available mortgage finance There is clear latent demand but, where previously this was being translated into actual sales, this is now fast running out of steam due to the lack of finance Local Planning Authorities in the more attractive areas i.e. areas of high demand (and that is a relative term) such as Stratford upon Avon are still trying to avoid the inevitable with regard to housing supply The combination of these two factors is holding back activity Drivers of change The lack of first time buyers has led to a slow-down in the family housing market which has been the bedrock of the housing market over the past 2/3 years The demand will be for family homes in good areas for the foreseeable future There is also still strong demand for top of the range houses Outlook Housebuilders are very risk averse and therefore we expect smaller housing sites to be favoured it is difficult to see strategic sites coming forward in the next five years. This will create local problems of supply where Local Authorities have relied upon sustainable urban extensions, or SUEs, to meet housing needs/targets Forecast house price growth Midlands (House Price Index 2000 = 100) East Midlands West Midlands Table 5: Annual average growth in house prices to 2016 East Midlands West Midlands % 1.1% % -3.7% % 0.5% % 0.2% % -1.2% % 1.8% % 5.4% % 5.1% % 6.3% % 7.5% (inc.) annualised 6.6% 5.2% Key points There will be some disparity in performance between the East and West Midlands in the next 5 years, with the East Midlands producing stronger price growth Local Authorities across the whole Midlands Region, faced with the challenge of trying to stimulate growth away from just the areas of highest demand, are likely to permit large scale releases of Greenfield sites in less popular areas. Already there is evidence of this happening with landowners ready to capitalise upon a more relaxed and positive planning framework in these areas I9I

10 NORTH House prices Over the last five years, the northern regions have on average seen marginal declines in house prices The North East has seen house price change of -0.3% p.a. since 2006, the North West -0.4% p.a. and Yorkshire -0.5% p.a. compared to a national annual average of 0.1% positive growth over the same period The southern regions will continue to dominate in the next 5 years, driving up the UK average to 6.0% p.a. However, the outlook for the north of England is nonetheless very positive Annual growth of 5.2% p.a. is forecast for the North East in the period to 2016, with 4.6% and 4.2% p.a. expected in the North West and Yorkshire respectively Overall, in the ten year period to 2016, the North East will in fact have delivered the most price growth of the three, producing a cumulative increase of 25% relative to 21% in the North West and 19% in Yorkshire Current housing market issues The market remains constrained by caution and sales volumes are still only half that transacted in 2007, reflecting the uncertainty felt by lenders, developers and sellers alike There is evidence of more property coming to the market but this has not been met by increased demand, indicating that either unrealistic asking prices or undesirable property types are being offered The provision of affordable housing remains challenging as funding constraints limit the refurbishment of existing stock and viability issues hamper the provision of new units Drivers of change The regeneration of large amounts of obsolete housing stock remains a fundamental issue to be tackled in many urban areas and both in the current downturn and in improved conditions an inability to address this will constrain local housing markets In the face of continued challenging conditions for new development, even with house price growth, a realistic approach is needed from Local Authorities in order to attract development activity into an area A return to larger scale urban schemes requires genuine innovation in both the quality of the homes provided and their procurement and delivery Citu s Greenhouse scheme in Leeds being a good example Outlook There will continue to be tension between the requirements for wider community benefits (notably affordable housing) and the effective delivery of marginally viable sites Urban apartment schemes will return in the larger cities but will have to provide improved products that are tailored to meet demand either from owner occupiers or a more discerning and risk averse investment market Forecast house price growth North (House Price Index 2000 = 100) North East Yorkshire Table 6: Annual average growth in house prices to 2016 North East Yorkshire North West % 0.6% 0.9% % -3.6% -3.8% % 0.7% 0.7% % -0.9% -0.5% % -0.3% -1.0% % -0.4% 0.3% % 3.9% 5.8% % 5.2% 4.5% % 6.3% 5.9% % 6.2% 6.9% (inc.) annualised 5.2% 4.2% 4.6% North West Key points The North is forecast to deliver healthy house price growth in the coming period, albeit that increased sales volumes remain dependent on greater (and less restrictive) mortgage availability and the return of first time buyers This return to trend growth should allow northern housing markets to re-establish stability, which will enable development activity to increase from its current low base Housing and the Economy Summer 2012

11 NEW HOMES Looking at the volume of planning permissions coming forward it is clear that the number of units is increasing. However, the number of schemes is reducing. This can only mean one thing: schemes are getting bigger. This suggests, firstly, that volume housebuilders are back in play and, secondly, that smaller developers may be being squeezed out of the market by the lack of available finance. New build mortgages have increased, enhanced by the first time buyer market which was encouraged in part by the first time buyer Stamp Duty holiday and a reasonable availability of low deposit schemes through NewBuy and other developer-led initiatives. In the lettings market, although renting in many cases is more expensive than buying, renting remains the only option for those unable to meet strict lending criteria. Stock availability is still an issue, as tenants are increasingly staying in their properties for longer periods. Demand is outstripping supply; however, rent increases are slowing as the limits of tenant affordability are pushed. The average ratio of visits to sales has increased and the average sales price as a percentage of asking price has decreased, with the average time between first visit and reservations also increasing. This shows that purchasers are taking longer to decide and greater footfall is required to secure the same number of transactions across the country, with far greater levels of incentives needed to secure the sale. Positively, though, the number of investors and first time buyers has increased. The country remains separated by a very distinct North/South divide in terms of creating positive viability to enable development. The North remains constrained by there being greater costs on remediation and infrastructure against what is achievable in terms of sales revenue, due to the region s industrial legacies. The South is more affected by the level of affordability of the stock than by availability. London continues to buck all trends, having achieved the strongest growth both in terms of numbers delivered and sale price growth. However, there remains a very different picture forming between the Inner and Outer London Boroughs, with Central London showing strong growth taking it back to pre-recession levels. We still predict institutional investors to become more and more acquisitional in the residential sector, and this can only help to improve development levels and drive growth both in the numbers of units coming forward and in sale prices. We expect there to be an increase in development agreements and joint ventures between financial investors and housebuilders going forward. I11I

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