The end of 2019 not only marked the end of the decade but also the end of four years of political chaos and uncertainty across most markets. Since the Brexit vote, virtually all sectors of the property market have at best been in a state of stagnation. Transaction levels have steadily declined. Supply to the sale rooms of residential auction houses has largely been driven by those who cannot, or need not, wait to sell. Those who have had the ability to do so have generally elected to hold on to assets until a degree of perceived stability and confidence is restored. Despite reduced volumes, values at auction have remained reasonably stable throughout 2019 as sellers held firm on pricing, especially when negotiating post auction.
The election result appears to have bolstered the market overnight. Our sale on 17 December was an entirely different event to any auction held previously last year. Bidders competed enthusiastically and often well in excess of reserve prices. To date over £51m has been raised with 83% of lots sold. It seemed that the savvy investors and traders had called the bottom of the market. This wind of change was also evidenced by reports of larger private treaty deals, particularly in central London, finally after months of delay and doubt.
But does this ‘Boris Bounce’ herald five years of growth and prosperity? Certainly, any threat of recession has receded. Perhaps surprisingly, the level of distressed stock reaching the room has not changed significantly in recent years. That is not to say that there is insignificant unresolved distress in the market. We are aware that many lenders, particularly challenger banks, will need to address impaired loans sooner or later. In the past, we have seen an upturn in distressed selling as the market shows signs of growth. So this sector could be the source of increased supply, and potential buying opportunities, over this year and next.
As many had forecast, there has been an evident release of pent up demand. But there are still several checkpoints on the road ahead. Britain will leave the EU on 31 January. However, in the absence of a clear deal, investors would do well to maintain some caution.
The Nationwide Building Society has reported that UK house prices increased by 1.4% year on year in December. Industry predictions for 2020 remain modest at between 1% and 2%. However, it is likely that renewed certainty and confidence throughout the year will translate into wider economic growth. The bigger gains in property values are more likely to be seen in 2021 as capital appreciation gains a foothold.
House price growth will be driven primarily by improved affordability. That will be influenced by interest rates, wage growth and reduced unemployment. The government has indicated its intention to encourage home ownership. Lenders will compete for business by offering attractive deals on longer term loans with reduced deposits. The regulation of mortgages by the Bank of England, however, will continue to exert control over excessive borrowing.
The budget – now postponed until 11 March – will be important. Most commentators agree that wider reform of stamp duty remains unlikely given the government’s spending commitments. A 3% surcharge is proposed for non-UK residents. We may see foreign buyers acting quickly to beat the charge, particularly while sterling remains weak. Their focus is likely to be prime central London.
The Queen’s Speech revealed the government’s proposal to introduce a ‘First Homes Initiative’ scheme aimed at offering first time buyers a discount of 30% on the purchase of new build homes in their local area. Since this discount is expected to be funded by developers, reduced revenues will potentially impact land values.
Plans were also announced to introduce ‘no fault’ eviction notices by removing s.21 of the Housing Act 1988. This currently allows landlords to recover possession without giving a reason at the end of the fixed term of an assured shorthold tenancy. If implemented, legitimate grounds, such as non- payment of rent or damage to the property, will need to be shown before possession is granted. The impact that the final legislative framework will have upon the residential investment market remains to be seen.
Many will view any residual uncertainty as opportunity. A steady 2020 will be an encouragement to sellers who had been on the fence in 2019. Investors should be motivated by the prospect of accelerated growth in 2021. As always, reserve prices will need to be set to generate competition if maximum value is to be achieved. Under these conditions, it looks like the Allsop residential auction room will be an increasingly busy trading ground for the foreseeable future.