UK & London 2016 House Price Forecast

UK & London 2016 House Price Forecast

Kate Faulkner looks at the outlook for UK and London house prices in 2016.

By Kate Faulkner, Managing Director at Designs on Property in For Landlords.

UK & London 2016 House Price Forecast

Property market predictions

It’s that time of year when the economists and property professionals get out their crystal ball to give investors their property market predictions for 2016.

Unfortunately, house price forecasts are notoriously difficult to get right. Part of the reason for this is because a lot of the market is driven by confidence, or even fear. Any bad news on the economy or even something like a war breaking out can turn the market downwards within a matter of days.

What is the house price index?

When it comes to reviewing house price forecasts, one thing to be aware of is that there are lots of different house price indices. These measure prices at which dwellings are bought and sold at through different stages of the buying and selling process. 

For example, some measure the price properties are marketed for, while others focus on properties which are mortgaged and this leads to a variety of property price forecasts. However, we do have 15 years of individual sold property price data from the Land Registry which has tracked property prices through good times and bad. This helps forecasters better understand and predict what impacts on property prices going up and down.

UK house price growth forecast

In 2015, the latest Office of National Statistics data (ONS) suggested house price growth was up 7% year on year in the UK. The Land Registry data, which covers England and Wales, recorded rises of 5.6% year on year in November 2015.

ONS House Price Index

This is ‘average’ house price growth and performance varies greatly across the UK and especially between regions. The ONS analysis shows the 7% growth they’ve recorded is made up of year-on-year price increases year of +10.3% in Northern Ireland; +7.4% in England, while in contrast Wales grew by just +1.0% and Scotland by +0.9%.

UK, country and regions All dwellings annual house price rates of change

UK

7
England 7.4
Wales 1
Scotland 0.9
Northern Ireland 10.3
North East 2.9
North West 4.4
Yorks & The Humber 3.5
East Midlands 6.3
West Midlands 4.6
East 10.4
London 7.7
South East 9.5
South West 5.8

Land Registry House Price Index

When we then break down the growth rates by region in England, the 5.6% growth shown by the Land Registry is driven by a few regions of high growth such as London which grew by +11.2% and the East was up by +9.8%. For property owners in other areas such as the North East and Yorkshire and Humber, prices grew only slightly by 1.3% year on year.

Region Annual change (%)

London

11.2

North East

1.3

Wales

3.7

East

9.8

South East

8.0

South West

5.6

North West

3.1

West Midlands

2.9

East Midlands

4.1

Yorkshire & The Humber

1.3

Savills and Knight Frank forecast

Taking this into account, it’s worth making sure forecasts for 2016 are considered nationally and regionally. The current house price growth forecast from property companies such as Knight Frank and Savills range from 4-5% ‘on average’. But, the economic forecasters are suggesting prices may rise at a lower rate.

The Centre for Economics and Business Research (CEBR) suggests a 3.5% increase while Capital Economics is more sceptical, forecasting an increase of just 2%.

London house price forecast

Regionally in England, London has continued to top everywhere else since 2014. In the last 12 months, prices grew by +11.2% (Land Registry) overall. However, individual boroughs performed differently.

The best performing areas for 2015, such as Hillingdon; Enfield; Bexley and Newham, were all up about 12% year on year, while the likes of Hammersmith and Fulham which have risen rapidly in previous years, actually fell slightly.

The forecasters believe price growth will continue to slow. This is due to London’s property prices experiencing double digit growth over the last few years, as well as the government limiting mortgage lending. 

Knight Frank suggests London property prices are forecast to rise by 5% while the Savills forecast is slightly higher at 5.5%. A new report created by the National Association of Estate Agents (NAEA) and Association of Residential Letting Agents (ARLA) produced with the CEBR suggests a higher increase of 6.9%, although that’s still lower than the last few years.

Other regions across the UK are expected to grow at an average of 4-6% with a few areas such as the North East only achieving house price growth of +2.5%, although it’s worth remembering that’s a bigger increase than seen so far in 2015.

What does the outlook look like for Landlords in 2016?

So does this growth help or hinder landlords in 2016? Mostly for all investors the forecasted growth is good news, whether new to the market or if you’ve been in it for years.

For those that are holding properties with cash, growth on your investment will be more limited though than growth you could achieve on your cash if you ‘gear’ your investment – ie own it with a mortgage.

For example, if you own a £150,000 property with cash and it grows in value at an average of 4% in 2016, it will be worth £156,000. This would mean a return of £6,000 by the end of 2016.

If on the other hand you mortgage the property with a 50% loan to value, the £6,000 growth would be based on cash invested of £75,000. That would mean your uplift doubles to an 8% return on your cash.

Though the repayments may reduce your annual income, the mortgage cost is tax deductible. It’s worth checking whether investing with 100% cash versus having a mortgage is the right way to maximise returns based on the money you invested.

Buy to let in 2016

Despite the ‘good news’ about property price forecasts, there is currently a real sense of ‘doom and gloom’ in the buy-to-let market going into 2016.

This is mainly due to the tax rises announced in 2015. But, if you buy well and run your buy to let as a business, reviewing revenue and minimising costs regularly, these issues don’t need to be as big a problem as some are suggesting. This is mainly because they can be mitigated over the time of your investment.  

Mortgage tax relief changes for example are being phased in from 2017 to 2020. So there is plenty of time to focus on making sure your property is rented out for its maximum value. Plus, with mortgage rates currently so low, checking you’re on the best rate can help reduce on-going costs.

Stamp Duty rates in 2016

One particular problem area at the moment is the rise in stamp duty rates for those investing in a second home of 3% from April 2016. This means you need to put more money in initially, but it’s worth remembering the duty itself is tax deductible when you sell. Plus, as a buy-to-let investment should generally be a 15-20 year investment and as annual rises are expected to be anything from 2-5% or more each year, it shouldn’t take long to recoup the increased cost.

Although making money from buy to let in 2016 will get tougher due to new tax burdens, prices and capital growth are set to continue to rise. As such, there is money to be made.

Once the new stamp duty applies after April 2016, it’s likely to lead to less new investors being attracted to the market, which, overtime could help to reduce competition for investment properties, keeping the price you pay at a reasonable level. If you can buy well and keep control of your costs, mitigating the impact of mortgage tax relief changes, it’s still possible for buy to let to deliver great returns.

Landlord Insurance Kate Faulkner Blog

Kate Faulkner
Last Updated: 06 Aug 2015