The wrong side of the property cycle can be an uncomfortable place to be.
When a client of buying agent Henry Pryor went through a divorce in 2014, her first instinct was to buy a new home. Before taking any advice, she put her house in the south of England on the market for £2m — and assuming it would sell quickly, paid more than £2m to secure her new dream home.
Unfortunately, her timing could not have been worse.
Stamp duty changes at the end of 2014 turned the market against her, and the marital home remained unsold. Then the Brexit vote in 2016 spooked buyers at the top end of the market. Hefty discounts were unable to attract a buyer for the first property, or indeed the second — which she had to put on the market after realising drastic action was needed.
Six years on from that fateful decision, she has only just sold the second property for the same price she had paid for it, and is back in the original home, doing it up for another foray into the market. “It’s taken her six years to go precisely nowhere,” says Mr Pryor.
Timing the cycle right plays a central role in whether property owners and investors make money when buying or selling a property — but what forces determine where prices might go next?
New research exploring the price gap that has opened up between London and the rest of the UK shows the property cycle is going through a pivotal stage.
Many homeowners in wealthier areas of the country have seen their housing equity pile up, yet average house prices in less prosperous regions are still below 2007 levels in real terms. The issue has gained a renewed political relevance, as Boris Johnson’s Conservative government promises to “level up” the gulf in economic opportunities between the Southeast and elsewhere.
If the housing cycle follows a historic pattern in which regional markets catch up with London, Mr Johnson’s task of levelling up will be easier to achieve. But if the house price gap that has opened up over the past decade becomes the “new normal”, this geographic wealth inequality will persist, creating obstacles for enterprise and labour mobility.
Two-speed cycle
The UK is often described as having a two-speed market, with London and the Southeast portending recovery or stagnation ahead of the rest of the country.
Moving in waves from the highest priced areas, growth in the prime central markets of Mayfair, Chelsea and Knightsbridge, which are a magnet for international wealth as well as domestic money, prompts higher demand and rising prices in well-to-do professional areas such as Fulham or Wandsworth, or places further afield but within commuting distance such as Oxford and Cambridge. The flow of price rises then spreads outward, to cities in the Midlands and the North.
New research from estate agent Savills suggests that the wave effect is borne out — though with some interesting nuances. Savills looked at places where prices since 1995 were most closely correlated in their rise and fall, rather than their absolute value.
The analysis produced 13 groups of correlated local authorities, ranging from London’s cluster of prime markets to “Wealthy Metroland” (including St Albans, Windsor and Wokingham), “Fringe Commute” (including Chichester, Bristol and Bath) and “Challenged Northern Towns” such as Blackburn and Burnley.
This final group was the last to feel the ripple effect of price rises originating in the opulent environs of Kensington & Chelsea, which Savills used as the benchmark area for its study.
Over the past 25 years, although average house prices in the northern towns have risen by 192 per cent, this compares with a 628 per cent increase in the central London group (without adjusting for inflation).
The groupings illustrate to near perfection the cycle that ran from around 1995 to 2005, says Lucian Cook, residential research director at Savills. When Mr Cook looked at how prices had waxed and waned over this 10-year period, he found a classic “leaders and laggards” effect.
In the first six years, prices in prime central London shot up by over 160 per cent. Growth was lower in each descending group, until it reached a sluggish 5 per cent in the northern towns of the 13th group. Over the subsequent four years, however, growth in the lower groups rapidly closed the gap, rising to 140 per cent, as the surge at the top petered out and the regional economy took off.
“Price growth broadly evened itself out over a 10-year period,” Mr Cook said.
Yet the factors that caused the regions to close the gap with London in the 10 years leading up to 2005 were particular to their era.
Prices in the capital took off after 1995 as the dotcom industry boomed, only for the bubble to burst around the turn of the millennium. This was followed by a sequence of global events, including the Twin Towers attacks in New York, the invasion of Iraq and an economic slowdown in the US, which subdued the market, particularly in central London.
At the same time, the then chancellor Gordon Brown invested heavily in the public sector, boosting the purchasing power of buyers in places such as the Midlands, where the share of public sector employment was high.
“House price growth in regional markets took off in 2001 to 2003, to the point that house price growth was running at over 30 per cent in some regions,” says Richard Donnell, research director at property website Zoopla.
Widening gulf
The millennial-era cycle followed the typical pattern: a London-led surge followed by a period of catch-up in the rest of the country. What happened after 2008-09, however, has led to questions over whether the pace and character of the cycle has changed in a more fundamental way.
“Post 2005, the gap has widened to a more significant degree,” says Mr Cook.
Among Mr Cook’s 13 groups, prices in the top two are up 125 per cent and 109 per cent respectively in the 15 years since 2005; the bottom three have risen by just 15 to 17 per cent.
As the London economy has strengthened relative to the rest of the UK, more workers have been drawn to housing markets in and around the capital.
Liam Bailey, head of research at estate agent Knight Frank, says London’s position in the UK housing market goes hand in hand with its lead in many other economic areas such as finance and technology.
“This dominance matters because workers will sacrifice space to live near to these opportunities — opportunities which just don’t exist anywhere else in scale, and they will pay for the privilege,” he says.
Back in the 1990s, he adds, average prices in London were about 40 per cent above average UK levels; now they are around 100 per cent higher.
Some who think the traditional cycle may not be operating as it did in the past point to the effect of long-term ultra-low interest rates on the ability of people to afford mortgages — and keep on affording them.
Ed Mead, who founded the property viewing service Viewber after a long career in estate agency, argues that as long as interest rates remain low, the cycle will be stretched out over a much longer period. In previous cycles, a sharp rise in rates or economic troubles were more likely to place such pressure on people’s finances that, unable to pay the mortgage, they might be forced to sell up, he says.
“Now they can refinance, they can fund their debt and there are lots of ways to extend the period which would normally have driven them to sell. I don’t think the reset button will be pressed until interest rates return to a normal level.”
Signs of reversal
While many continue to have confidence that the capital’s housing market will hold its own in the long term, it suffered a setback in the past three years as Brexit uncertainty tested demand — particularly from the cash-rich overseas buyers who typically lubricate the upper echelons of the market.
Regardless of low interest rates, average buyers in London have also found themselves hitting the limits of mortgage affordability after the introduction of tighter regulations — mortgage stress tests and income limits — that were not present in previous cycles.
Neal Hudson, director of market research group Residential Analysts, says: “Although the last decade was dominated by the rise of London and particularly its most expensive markets, the last three years have seen a bit of a reversal of that. The London market has stagnated and prime central London in particular.”
Mr Hudson also points to stamp duty changes in 2016 that placed a 3 percentage point surcharge on purchases of second homes and buy-to-let. In many parts of the country, first-time buyers flooded in where landlord investors could no longer make the sums add up — but not in London, with its higher hurdle of affordability.
“It killed the London market as investors withdrew, but first-time buyers couldn’t replace them,” Mr Hudson says. “London transaction volumes are down around 25 per cent from 2014, whereas the Northwest is about 15 per cent up.”
Mr Mead says regional activity in his business, which organises thousands of property viewings each month, took off after the general election with bookings in the first two weeks of January up by 50 per cent on the same period last year.
“It is happening in places like Doncaster or Manchester, not London,” he says. “There does seem to be a real drive. Something’s changed in people’s desire to engage.”
Mind the gap
How much further would house prices in the regions need to rise to close the gap with London? Mr Donnell runs a long-term index of house prices in UK cities, using data from Zoopla. According to his research, house prices in cities such as Manchester, Nottingham and Glasgow would need to rise by an average of 8 per cent to get back to their long-run average relationship to London — or by 15 per cent if they were to regain their highest position relative to the capital, achieved in 2003-04.
“This assumes four to six years of steady growth and prices remaining static in London,” he says. “Regional city markets can outperform and catch up further in the next 5 years — but it will be a slow realignment.”
However, there is political desire to improve the lot of the “left behind” in the English regions and devolved nations, with ministers announcing above-inflation rises in the minimum wage, billions in investment to fund a regional growth drive and £500m promised to help restore rail lines which closed over 50 years ago.
A helping hand may also come from the mortgage market. “Low mortgage rates have not yet been fully priced into regional markets,” says Mr Donnell.
Outside London, buyers are in a better position to pass affordability tests — a differential not present in previous cycles, when mortgages were far easier to obtain even at the highest ratios of loan to property value. In the capital, the reverse applies, says Mr Hudson: “London has reached a place where affordability is stretched given current lending criteria — particularly with the stress tests — so you’re unlikely to see growth there in the near term.”
Even if house prices in the regions receive a political boost, Mr Cook’s view is that the long-term historical trend will struggle to resolve itself with regional markets clawing back only some — but not all — of the ground they lost over the past decade.
“Markets further from the capital, such as Leeds, Liverpool and Sheffield were much slower to recover post-financial crisis and have much greater capacity for house price growth relative to incomes, even as interest rates rise,” he says. “But I don’t think the differential between London and other groups will close fully over the period. To an extent [the leading markets] have become much more dislocated from other parts of the UK.”
Under Savills’ five year forecasts to 2024, the Northwest is tipped to show the strongest price growth of 24 per cent, followed by Yorkshire and the Humber, where prices are predicted to grow by 21.6 per cent. Wales and Scotland follow, with growth of around 18 per cent and 20 per cent respectively. In Greater London, though, Mr Cook sees little sign of a resumption of pre-Brexit growth rates, with prices forecast to rise by just 4 per cent over the next five years.
Capital performance
In the short term, at least, his prognosis for the capital may be challenged by signs of a resurgence in the London market, partly in reaction to the general election victory. Transaction figures released this week show sales of £1m-plus homes were higher in the last three months of 2019 than in any fourth quarter in the past 10 years. Rightmove, the property site, said visits to its site in January broke records for any month in its 20-year history.
The December 31 deadline for Brexit trade negotiations could cause uncertainty to ramp up again, but Mr Hudson suggests the Brexit effect was overblown last year as UK-wide transaction levels remained impervious to Westminster’s sturm und drang.
“It’s not clear that the end of the year will bring a cliff-edge slowdown in the housing market. A lot of people got caught out over the summer talking about a Brexit-related slowdown. Broadly, at a national level, there was no Brexit slowdown last year.”
For those who owned or bought property in and around London at the beginning of the latest cycle, it can be easy to forget that the market ebbs as well as flows. Mr Pryor, who started in the property business in 1983, has seen on many occasions how mistiming the market can trigger immense financial and emotional pressures. When prices are rising fast, such errors are easily masked.
“Buying a house for many people was like falling off a log,” he recalls. “When you’ve got homes earning more in house price inflation than their occupants themselves were earning, how hard was it to get it wrong? If you did overpay by 10 per cent, 12 months later Mr Market had spared your blushes and you could once again start boasting at dinner parties about how well you’d done. But Mr Market has a habit of coming back to bite you.”
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Where are we in the property cycle? - Financial Times
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