Mending the broken housing market
The long-standing problems in the housing market are laid bare in the latest transaction figures. According to HMRC, there were 86,200 housing transactions in April, more than 12,000 fewer than in March and 2 per cent lower than in April 2017.
These figures are only marginally higher than transaction levels in February and January this year (81,000 and 80,000 respectively). Given the seasonal nature of the property market, many would expect a more marked jump as we enter the busiest months of the year.
In contrast with the figures above, transactions exceeded 100,000 in the last seven months of 2017, as well as in March of that year.
These aren’t the only figures pointing to a more pronounced slowdown in§ the housing market. Figures from LSL Property Services show that there was a 25 per cent drop in transactions in April, compared to the previous month. LSL says this may be partly due to adverse weather conditions. The so-called ‘Beast from the East’ hit at the end of February, potentially reducing househunting activity that may have affected transaction figures several months down the line.
But this isn’t just an issue of the housing market slowing down in 2018 – although it has had a particularly sluggish start to the year. For housing analysts, the challenge is to split out shorter-term factors – such as the weather – from longer-term structural problems. When these latest transaction figures are seen against longer-term trends, they suggest more significant problems in the housing market.
In 2007, there were more than 1.6 million residential property transactions a year; in 2006, this figure was just shy of 1.7 million transactions.
Housing sales then almost halved in the wake of the global financial crash and subsequent contraction of the mortgage market. There was modest recovery in 2013 and 2014, with the number of transactions rising by 15 and then 13 per cent – to almost 1.1 million then 1.2 million transactions a year.
But since then the market has effectively stalled, with anaemic gains of less than 1 per cent in 2016, which were almost wiped out by falls in 2017. Given the slow start to this year, forecasts are for transactions to be around the 1.1 million mark this year – back to levels seen five years ago.
Former RICS chairman, and north London estate agent, Jeremy Leaf says: “These latest housing market statistics are concerning, not least because we would have expected more positive news now we’re in the spring buying season.
“The principal concern for us is not the change in prices but the significant fall in the number of transactions.”
He says it is these transaction figures that are a far more accurate bellwether for the strength of the housing market.
“This reduction is not only bad for the housing market but for the economy, especially when you consider how many associated businesses and people lose out as a result.”
The question is what can be done to reverse this trend and get the housing market moving again. London & Country’s associate director David Hollingworth says: “The lack of supply of property, particularly affordable property, is the main reason why transaction figures remain stubbornly low.”
Legal & General Mortgage Club’s director Kevin Roberts agrees and says a lack of appropriate housing stock, coupled with rising demand, is “squeezing the bottleneck in our housing market”.
This isn’t just creating acute problems for those looking to get onto the housing ladder — who face the additional financial pressure of rising rents in many areas. Roberts says it is also creating problems for those looking to move up the property ladder, as well as those wanting to downsize.
Addressing these supply issues may boost transactions, but only over the longer term. Hollingworth says: “There has been a lot of talk from politicians about ambitious home-building programmes. We now need to see them deliver on these promises.”
In the interim, a more immediate boost may come from reforms to stamp duty or improvements to the home-buying process.
Hollingworth says: “The high cost of moving is undoubtedly causing problems. Rising house prices have pushed up all associated costs, and the changes to stamp duty have exacerbated these issues at the top end of the market.”
As a result, people find it makes financial sense to improve, rather than move – further choking off supply. And these financial considerations don’t just apply in the upper stamp duty brackets. Many in more modestly priced family homes find the cost of a loft conversion or extension is significantly less than the associated costs of moving to a larger property.
While most welcomed more stamp duty reforms, which created a more graduated system, some are now calling for further changes to this tax.
Stamp duty has been lifted for the vast majority of first-time buyers. Is it time for similar dramatic action elsewhere in the housing chain?
Leaf says he doesn’t expect the government to move on this issue. “For political reasons, I don’t expect to see a u-turn in the decision to raise stamp duty for more expensive properties, which has had such a negative impact on the sale of houses over £1m, as well as the rest of the market.
But he says stamp duty concessions to first-time buyers could be extended, perhaps to include those looking to downsize. He says: “This could release a significant number of larger homes occupied principally by older people. This revenue lost through stamp duty could be replaced by council tax. It seems crazy to me that the £320,000 upper value band, set in the 1991 revaluations, has not been increased, particularly as house prices in London have risen by over 350 per cent during this period.”
Higher tax for staying put but less tax for moving might encourage a far more fluid market.
The government is also eyeing changes to the homebuying process. A recent government paper proposed a raft of improvements designed to streamline the process and address the fact that a quarter of house sales currently fall through.
John Charcol’s senior technical manager Ray Boulger says: “There are a lot of reasonable suggestions here that could improve this process.”
One suggestion is a “reservation agreement”, creating an earlier binding agreement between vendor and seller. If either pulled out there would be a financial penalty to pay.
Boulger says any such agreement would need to have enough of a financial penalty to make a difference, but not be so punitive it might deter vendors and buyers from putting in, or accepting, offers.
Boulger says he’d also like to see vendors providing more up-front information to potential buyers. “This could include information you’d find via local authority searches or the terms of the lease.”
There is some precedent for this. Vendors currently have to provide EPC certificates on a property’s energy efficiency. Boulger says: “I am sure most buyers would rather know the terms of the lease.”
Investec Bank’s business development manager Peter Izard adds: “Far too many house sales fall down on issues related to the property that are only discovered further down the line. “It would make sense for property sellers to undertake this due diligence in advance and flag up key issues.”
He says that there is a fear in the industry that this would deter “speculative sellers” and be a further brake on supply.
But Izard says: “This is a fundamentally flawed view. It would be better if there were fewer speculative sellers but a far higher proportion of properties on the market selling in a timely manner.”
But Leaf warns that there is a danger that requiring sellers to do more may create more problems than it solves. As he points out, similar attempts to try this before via ‘home information packs’ did not prove successful.
He says: “It is absolutely essential that any homebuying reform does not compromise activity.
“An increase in buyer/seller certainty, rather than making sellers’ surveys compulsory, would be preferable. As the residential chairman of RICS when the institution served a judicial review on the government’s last homebuying reform proposals, I know more than most how difficult it will be to make meaningful improvements to the process.”
Boulger says these changes alone won’t boost the number of property transactions overnight. But he says given the low numbers, one of the key problems is creating stable property chains.
Such reforms could address this issue, he says, preventing transactions dipping further. Getting housing transactions back to pre-crash levels may be an unrealistic aim, but the industry and the government may need to look at more radical ideas if they want to halt this inexorable decline and ensure the housing market is on firmer footings.
Source: Mortgage Strategy