Property News Round Up May 2016
This month we take a look at property sales and price trends, the possible effect of the EU Referendum on house prices and also the likelihood of interest rates rising in the near future.
Property Sales Activity
Figures released by the ESPC for the period between February 2016 and April 2016 show that the number of homes sold, across East Central Scotland, has increased 1.1% annually when compared to the same period in 2015. While the trend that we have seen over the last several months is continuing, with the number of properties available for buyers being unable to keep-up with the demand from buyers, the number of new properties coming to the market between February 2016 and April 2016 has actually increased by 2.5% compared with last year, showing modest yet positive growth.
House Price Trends
Between February 2016 and April 2016 the average selling price across East Central Scotland decreased by 5.7% annually according to the latest ESPC figures. This decrease is less than annual decrease that we reported last month, suggesting that the apparently significant year-on-year drop in the value of properties last month was actually down to the rush of higher value properties coming to the market in February and March of 2015 to beat the change from Stamp Duty to Land and Buildings Transaction Tax (LBTT) in April 2015. This essentially created an artificially increase in the average house price reported in various House Price Indexes at that time. For further information about why average house price surveys can be misleading, check out our article here.
Record Number of Properties Sold ‘Offers Over’
This month, both The Herald and Edinburgh Evening News both reported that the ‘Offers Over’ system has reached record levels. The latest figure released by the ESPC suggesting that the 83.8% of properties currently sold using the ‘Offers Over’ asking price is greater than the number of homes sold using ‘Offers Over’ in both the first quarter of 2004 and the first quarter of 2007, when the proportion of properties for sale at offers over was at 76.5 % and 72.9 % respectively.
When MOV8 Real Estate was asked for comment, we reported that we had witnessed a steady return to confidence in the market and we predicted room for further improvement. Speaking to both The Herald and Edinburgh Evening News, we commented, “There has been a steady increase in offers over properties, particularly in the past three years, returning to levels not seen since 2007 to 2008. However, the premiums being achieved are still lower than the 25 to 30% over the asking price that we were seeing in those days.”
The key differentiating factor here is probably the introduction of Home Reports at the end of 2008 which have since then prevented the slightly ridiculous situation of a £400,000 property being marketed at ‘Offers Over £250,000’ with a view to stimulating a bidding war between a high number of people, a significant number of whom have simply misunderstood what the property is actually worth but whose interest prompts higher bids from the people who are prepared to pay what the property is worth. For more information about ‘Offers Over’, what it means and how to decide what to bid on a property marketed at ‘Offers Over’, see our YouTube guide to the Offers Over system.
What Could Happen to Property Prices if the UK Votes to Leave the EU?
On 23 June 2016 the UK will vote on whether to remain part of the European Union or to leave it. George Osborne, the Chancellor of the Exchequer, warned that house prices could fall by 10% to 18% by 2018 in the event that the result of the vote is to leave the EU.
It should be noted that this calculation is based on today’s house prices, rather than prices in two years’ time, which are forecast to be about 10% higher than they are today. Taking that into account, the worst-case impact of an exit scenario, according to the Treasury, would actually be an 8% decline in prices.
In slightly more negative projections, ratings agency Fitch has said that house prices could crash by 25% in the event of a ‘leave’ vote and it further added that the value of Sterling would drop by nearly a third against a plethora of other currencies by the end of 2016.
Fitch commented that this would bring house prices back to a more affordable level, stating that, “UK house prices are currently up to 25% above ‘sustainable’ levels in relation to disposable income. This scenario could result in near-term price declines that result in house prices falling towards their sustainable level.”
A separate report by ratings agency Moody’s said that a vote to leave would have the biggest impact on the London housing market, which would lead to fewer sales to EU nationals in central London and which, in turn, would lead to lower house prices.
Relatively little comment has been made by economic commentators or ratings agencies on how prices in the Scottish property market, in particular, would be affected. However, the consensus seems to be that London would take the brunt of any house price fluctuation following a vote to leave the EU.
The International Monetary Fund (IMF) said that a vote to leave the EU could trigger “sharp drops in equity and house prices, increased borrowing costs for households and businesses, and even a sudden stop of investment inflows into key sectors such as commercial real estate and finance”.
This, they say, is due to a period of uncertainty and volatility that would follow a vote to leave, which the IMF stated would lead to “financial market volatility and a hit to output”.
Property analysts Hometrack stated, in a separate analysis of city house price growth and transactions across the UK over the past 20 years, that uncertainties in the market caused by external factors tend to have a bigger impact on the number of sales taking place than on house prices.
Therefore, according to these particular commentators, should there be a vote to leave the EU on 23 June 2016, we may see a slow-down in the number of properties selling, or indeed coming onto the market, rather than the dramatic downturn in prices that some other economic commentators have warned-of. It is worth also bearing in mind that the UK’s exit from the European Union would take place over a prolonged period, with some commentators saying the negotiations could take as long as two years and this could lead to a protracted period of uncertainty for the housing market.
It remains to be seen which, or any, of these experts are correct, should there be a vote to leave. If the result of the vote is for the UK to remain in the EU, then, based on these various comments about the economic impact of a vote to leave the EU, we would expect a ‘stay’ vote to remove any level of uncertainty that may currently be negatively impacting the property market across the UK and therefore see a positive positive impact on the housing market across the UK.
Interest Rates Remain Unchanged
This month, the Bank of England’s Monetary Policy Committee (MPC) voted once again, unanimously, in favour of keeping the Bank Rate (commonly referred to as ‘The Bank of England Base Rate’) at 0.5%.
At May’s meeting, the Bank of England’s interest rate decision took a back seat to the bank’s comments on the economic impact of a vote to leave the EU in the upcoming referendum on 23 June 2016, where the minutes stated “The most significant risks to the MPC’s forecast concern the referendum. A vote to leave the EU could materially alter the outlook for output and inflation, and therefore the appropriate setting of monetary policy. Households could defer consumption and firms delay investment, lowering labour demand and causing unemployment to rise. At the same time, supply growth is likely to be lower over the forecast period, reflecting slower capital accumulation and the need to reallocate resources. Sterling is also likely to depreciate further, perhaps sharply.”
Rates have been on hold since March 2009, when the committee first cut the Bank Rate to 0.5%. May’s decision marks 86 consecutive months of the same base rate.
The prevailing sentiment from independent economic research companies such as Capital Economics seems to be that an interest rate rise could happen by the end of this year, with predictions that inflation will surprise and spur the MPC into action before the end of 2016, in contrast to the expectations of those in the financial markets that interest rates could maintain their historic low until at least 2019.
It remains to be seen which of the experts are right, but the longer that interest rates and therefore mortgage rates remain at historically low levels, the longer the housing market will benefit from increased affordability of mortgage finance, and therefore of housing, for property buyers in the UK.
Get in touch!
As ever, if you’re thinking of buying or selling a property or if you have any other questions about the contents of this month’s news round-up, please do feel free to get in touch with our property experts today on 0345 646 0208 or by emailing [email protected] and one of our team will be delighted to help you.