- UK house prices dropped 0.05% (-2.76% inflation-adjusted) during the year to end-February 2013, to an average of £162,638 (US$246,416), according to Nationwide. Since the end of 2008, UK house prices have either fallen, or increased minimally.
- But the national figures conceal wide regional house price disparities. London prices have soared in recent years, and continue rising. The wealthier Southeast of England is doing well while the North and North West are in a mess.
From 2009 to 2012, London house prices rose by 8%, based on figures from Halifax. It was followed by South East (5%), East Angalia (4%), South West (2%) and East Midlands (1%). On the other hand, Northern Scotland registered the biggest drop of 28% over the same period. Other regions which saw house price falls include Scotland (-10%), North West (-5%), North (-4%), Yorkshire and the Humber (-3%), Wales (-1%), and West Midlands (-1%).
High demand from foreign buyers, who own more than 50% of properties in many central London boroughs, has fuelled the rise, as has the continued dynamism of London as a financial centre.
Kensington and Chelsea, one of London’s most expensive residential boroughs, was the country’s best performing housing market in March 2013, with prices soaring by 15.8% y-o-y to an average of £2,316,256, according to Rightmove.
"It is the strength of demand from overseas buyers that has driven up prices in central London boroughs and underpin this market," said Lindsay Cuthill, the head of Savills Fulham. "Prime areas – like Chelsea, Westminster, Hammersmith, Camden and Fulham – have a relatively low correlation with the rest of London, let alone the rest of the country, suggesting they really are in a world of their own."
- Residential property transactions rose by 5% to 930,000 in 2012 from the previous year, according to the Council of Mortgage Lenders (CML). The 3,693 units sold in the fourth quarter of 2012 was the highest since the last quarter of 2007. In 2012 the number of mortgages in arrears (2.5% or more of outstanding balance) dropped by 2.7% to 157,000. Likewise, repossessions fell by 6.2% to 35,000.
Scotland, surprisingly, registered the highest year-on-year house price increase, with a 6.7% house price gain in 2012 (2.7% inflation-adjusted), though the tide has turned since then. Northern Ireland saw an annual decline of 18% in 2012 (-7.2% inflation-adjusted).
The rise in prices in London has some alarming features. In Greater London the average mortgage repayment burden now stands at 35.7% of income, followed by the South West at 34.9% and the South East at 34.4%.
Northern Ireland had the lowest mortgage repayments burden at 20.3% of income. Nationally, mortgage repayments as percentage of income rose to 28.1% in 2012, from 27.5% in 2011, according to the Halifax mortgage affordability index.
UK house prices have held up relatively well due to four factors:
- Immigration and population growth have been strong, especially in London.
- Interest rates have been at record lows, with a large expansion of the money supply through “quantitative easing”.
- The City of London (London’s financial centre) continues to boom.
- Construction activity remains very weak. The output of new private houses fell 4.5% to £13.36 billion (US$20.24 billion) in 2012, according to Office for National Statistics (ONS). Construction of new public housing dropped 18.7% to £3.6 billion (US$5.45 billion).
In 2012, UK gross mortgage lending rose 1.43% to £142.86 billion (US$216.45 billion), according to the CML. However, it is still 60.6% down from the £362.76 billion total seen in 2007.
Nationally, UK house prices will likely remain static in 2013, according to Rightmove, Nationwide and the National Association of Estate Agents. The Royal Institution of Chartered Surveyors (RICS) actually expects UK house prices to rise by about 2% in 2013. It also predicts property transactions will increase by 3% , repossessions will fall below 35,0000 and housing starts edge up to about 115,000 in England. But locally, house prices in Northern England, Scotland and Wales are projected to drop further by up to 4% in 2013.
"Conditions are likely to remain as they are. In 2013 prices are again likely to end the year at levels close to where they begin, with the market continuing to lack any genuine direction," said Martin Ellis of Halifax.
Government under fire from economists
To buoy the economy, the government has announced the following measures:
- Newbuild house buyers will get government help with their deposit, worth up to 20% of the value of the property, interest-free for 5 years.
- A mortgage guarantee program will be set up to assist buyers of homes worth up to £600,000 (US$909 ,000), backed by up to £12 billion (US$18.18 billion) in government guarantees
- The government will also provide £3 billion (US$4.55 billion) emergency loans for the construction sector.
These measures have been strongly criticized in the financial press. They do not relieve the housing shortage. They will push house prices up. “It’s a bold move, perhaps a desperate one, but one that will be undeniably welcome by the beleaguered construction industry,” said Richard Threlfall of KPMG.
The government is resorting to inflating asset values, in the hope that rising wealth in richer households will create a “trickle down” effect. Its commitment to fiscal austerity has had a depressing effect on the UK economy, but it refuses to admit that more fiscal stimulus is needed. Hence the housing measures. “The government has finally recognized that housing might offer the fastest-acting pain relief for our economic woes,” says Threlfall.
In March 2013, the Bank of England’s (BoE) official bank rate was kept at 0.5%, in place since March 2009, despite an inflation rate of 2.8% (higher than the 2% target). At the beginning of2012, the BoE also implemented a further £50 billion (US$75.76 billion) of quantitative easing.
The economy grew by just 0.2% in 2012, with real GDP growth rates of 0.8% in 2011 and 1.8% in 2010. The British economy is expected to grow by 0.6% this year, half of the 1.2% growth forecast earlier, due to lower-than-expected exports, according to the Office for Budget Responsibility (OBR).
Analysis of United Kingdom Residential Property Market »
Monthly rents per sq. m. range from around GBP 36 to GBP 65. This means that a 120-sq.m. apartment rents out for around GBP 4,300 per month, while a 300-sq.m. apartment rents out for around GBP 19,600 per month.
Average square metre prices in the other luxurious areas of London range from around GBP 12,000 to GBP 19,000. A 120-sq.m. apartment here costs on average, GBP 14,000 per sq. m. or about GBP 1,700,000 to buy.
Monthly rents per sq. m. range from around GBP 34 to GBP 42. A 120-sq.m. apartment rents out for around GBP 4,000 per month.
The gross rental yield or gross returns on a fully rented out apartment, both in PCL and in the other luxurious areas of London is very poor.
In PCL, rental yields range 2.09% to 3.25%, whereas in the other luxurious areas of London, rental yields range from 2.54% to 4.36%.
Capital Gains: Capital gains are taxed are taxed at progressive rates, from 18% to 28%.
Inheritance: Estates or assets exceeding the current tax threshold of £325,000 (€371,429) are subject to inheritance tax at 40%. In calculating the amount of the estate, the value of any gifts made by the deceased within 7 years of death must be added (some small gifts are exempt).
Residents: UK residents are taxed on their worldwide income and on capital gains from disposal of their UK assets, and most likely on their overseas properties too.
Tenant Security: Contracts naturally revert to a standard monthly contract which, after an initial six month's period of security of tenure, allows the tenant to be evicted at two months' notice. However in practice the eviction process can disadvantage the landlord.
In 2012, the service sector, which accounts for about three-quarters of the economy, contracted by 0.1% while the production sector shrank by 1.9%.
The British economy is expected to grow by just 0.6% this year, half of the initial forecast of 1.2% growth, due to lower-than-expected exports, according to the Office for Budget Responsibility (OBR).
Chancellor George Osborne has pointed to the region’s debt crisis, highlighted by the bailout discussions for Cyprus, to explain why the UK economic recovery was “taking longer than anyone hoped”. Most economists, however, blame instead Osborne’s insistence on fiscal austerity.
In February 2013, the budget deficit fell to £2.76 billion (US$4.2 billion) from £11.76 billion (US$17.8 billion) in the same period last year, mainly due to the proceeds from the sale of fourth-generation mobile spectrum and after the Treasury received a second installment of cash from the BOE, according to the ONS. The deficit is expected to fall to 7.4% of GDP this year from 11.2% of GDP in 2009/10.
UK’s public sector net debt was at about 73.5% of GDP in February 2013. Net debt is expected to peak at 85.6% of GDP in 2017, according to the OBR.
The overall inflation rate was up to 2.8% in February 2013, the highest in nine months, mainly due to hikes in domestic energy tariffs and increases in petrol prices, based on figures from the ONS.
Despite exceeding the inflation target, the Bank of England’s official bank rate was kept at its record low of 0.5% in March 2013, in place since March 2009.
In January 2013, overall unemployment rate was 7.8%, unchanged on the quarter but down from 8.3% in a year earlier. However, the total number of unemployed persons increased by 7,000 to 2.52 million in January 2013, from November 2012.
The average earnings of workers rose by 1.2% in January 2013 from the same period last year. But the increase is just less than half the inflation rate, which means that average earnings actually fell in real terms.
"The situation [in the UK] is still fragile. I think the policy course, both in terms of monetary and fiscal policy, is going in the right direction and improvements are beginning to be seen", said Pier Carlo Padoan, the OECD's chief economist.