2. 1Cushman & Wakefield | Residential
ECONOMIC OVERVIEW
May’s Bank of England (BoE) Inflation Report indicated
the MPC (Monetary Policy Committee) will hold off
raising interest rates for the foreseeable future. While
the forecasts for the timing of the first rate hike vary
from Q2 2018 to Q3 2019, they are almost universal in
the opinion that when the ascent does commence, it
will be a gradual affair.
There was a widely unexpected slowdown in GDP in
Q1. Quarterly growth was recorded at 0.3% which was
below both the preceding quarter (0.7%) and also the
BoE’s expectation of 0.6%. While a minor upward
revision is possible, the MPC have subsequently
revised down their forecasts for this year to 1.9% (from
2.0%). However, these forecasts are based around the
presumption of a smooth Brexit process, which if
stories regarding Prime Minister May’s dinner with the
European Commission’s president, Jean-Claude
Junker’s are to be believed, has got off to a rather
stuttering start. Things look a little brighter for Q2 with
the major PMI’s suggesting GDP growth figures will fall
back in-line with the BoE’s annual expectations.
Economic Overview
ECONOMIC INDICATORS* 2015 2016
2017
(f)
2018
(f)
2019
(f)
GDP growth 2.2 1.8 1.8 1.3 1.6
Consumer spending 2.5 3.1 1.6 0.5 1.0
Industrial production 1.2 1.2 1.6 0.3 0.6
Fixed Investment 3.4 0.5 1.0 2.4 3.4
Unemployment rate ILO (%) 5.4 4.9 5.0 5.1 5.1
CPI Inflation 0.1 0.6 2.5 2.1 1.8
Exchange Rate (US$ per £) 1.5 1.4 1.3 1.2 1.2
Exchange Rate (Euro per £) 1.4 1.2 1.2 1.2 1.2
Short-Term Interest Rates (%) 0.6 0.5 0.3 0.3 0.4
Long-Term Interest Rates (%) 1.9 1.3 1.4 1.8 2.1
After a notable jump in February from 1.8%-2.3%, the CPI measure of inflation held at 2.3% for March. However the latest
release has recorded a further hike to 2.7% for April as energy and aviation price increases filtered through to take inflation
to its highest point since Autumn 2013. This brings the current rate of CPI close to its short-term expected peak of just
under 3%, with BoE forecasts predicting a topping out in the latter part of 2017, before falling largely in-line with its 2%
target by the middle of 2019.
In the jobs market, while the unemployment rate remained at the historically low level of 4.7%, the rate of wage growth in
February slowed to 1.9% in February, and was overtaken by the CPI measure of inflation, resulting in a real wage
decrease for the first time in 2½ years. Although this figure increased to 2.1% for March, it still looks as though the rate of
wage growth will run below inflation for a while to come.
Market Outlook
GDP Growth is set to slow down and bottom in 2018
Inflation Prices are already increasing
Interest rate On hold until 2019
Employment Unemployment rate stable but weak wage growth
Source: Oxford Economics
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
Mar 16 Apr 16 May 16 Jun 16 Jul 16 Aug 16 Sep 16 Oct 16 Nov 16 Dec 16 Jan 17 Feb 17 Mar 17 Apr-17
CPI Inflation & Average Earnings (y-on-y % change)
Wages Exc Bonus CPI Inflation
Source: ONS
3. 2Cushman & Wakefield | Residential
National Market
OVERVIEW
The three major House Price Indices (HPI’s) all continued to record a flat market from a price perspective, with the
Halifax index last showing an increase in prices in December 2016. The Nationwide follows suit by recording minor falls
in both March and April of this year. The historically flatter UK HPI records positive house price inflation for the first two
months of the year followed by a -0.6% fall in their latest release covering March.
The RICS market survey for April again showed a subdued market with both new buyer enquiries and new instructions
measures recording minor falls. As a result of this we would not expect any significant levels of transactional activity to
return to the market any time soon. The amount of stock currently on the market is also at very low levels, with the
survey recording 43.8 unsold instructions per contributor in April, compared with 46.8 in April 2016.
When broken down regionally, clear splits in rates of house price inflation are evident. By comparing Q1 2017 and Q1
2016 data we can identify that the North East, Yorks & the Humber, Scotland and the South West all followed their
respective 2016 trends, while other regions have had a reversal of fortunes. In this regard, the Midlands and Wales
stand out, with relatively high Q1 2017 growth replacing flat Q1 2016 figures.
Sources: UK House Price Index / Nationwide House Price Index / RICS UK Residential Market Survey
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17
Monthly % Change of Major House Price Indices
UK HPI (no Apr 17 data) Nationwide HPI Halifax HPI
-3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0%
North East
Yorkshire and The Humber
Scotland
London
East of England
North West
South East
Wales
West Midlands
East Midlands
South West
Quarterly House Price Inflation
Q1 2017 Q1 2016
4. 3Cushman & Wakefield | Residential
National Market (cont)
NEW HOME CONSTRUCTION
The volume of new home construction starts continued its upward trend throughout 2016 with over 40,000 starts in the final
quarter of the year. Although a weakened post-referendum pound has led to a marked increase in imported construction
material costs, we would expect the impact of sterling’s depreciation on overall construction cost inflation to be limited from
now on (baring further currency falls). We would therefore expect the rate of construction cost inflation to cool as we head
into the latter part of the year, with the main driver coming from well documented skill/labour shortages.
TRANSACTIONS
Latest projected sales transaction figures from HMRC highlight a possible upturn in transaction levels in March 2017. Sales
of residential property during the month were up 21% from the preceding month, although this figure is skewed considerably
by the seasonal nature of residential sales, where January and February levels are historically low. On this occasion, it is
also unhelpful to compare year-on-year levels as March 2016 experienced a significant spike in sales due to the impending
3% stamp duty surcharge on second homes. A clearer picture can therefore be obtained by comparing with the post-
2007/2008 downturn March average of 78,406. By this measure, March 2017 transactions are up 31% on the March, post
2007 average. Although this indicator of an increased fluidity in the sales market is welcome, it is worth noting that volumes
are still significantly down on pre-07/08 downturn levels.
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17
UK Sales Transactions
England Scotland Wales Northern Ireland
Post-downturn average (85,471)
Pre-downturn average (138,037)
Sources: HMRC / Department for Communities and Local Government / Department for Business, Energy & Industrial Strategy
60.00
70.00
80.00
90.00
100.00
110.00
120.00
130.00
140.00
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
Q1
2012
Q2
2012
Q3
2012
Q4
2012
Q1
2013
Q2
2013
Q3
2013
Q4
2013
Q1
2014
Q2
2014
Q3
2014
Q4
2014
Q1
2015
Q2
2015
Q3
2015
Q4
2015
Q1
2016
Q2
2016
Q3
2016
Q4
2016
Q1
2017
UK New Homes
(Index (RHS): Q1 2012 = 100.00)
UK New Home Construction Starts (LHS) Construction Costs - Labour & Materials (RHS) UK HPI (RHS)
5. 4Cushman & Wakefield | Residential
PRIME CENTRAL LONDON (PCL)
Capital values in PCL held flat during April and are down -0.4%
on the year. Increasing average discount to asking price figures
also suggest the immediate future of values is flat at best.
From a transactional perspective, the PCL market remains hugely
volatile due to what seems like an almost endless stream of
political and legislative events. This is evident in April’s figures
where year-on-year exchanges are up 75% (skewed by the
introduction of the 3% stamp duty surcharge in April 2016) but
down -57% from the preceding month, due in-part to the
announcement of June’s snap election.
Rental values in April continued to gradually fall and are currently
-1.5% down year-on-year, with the average discount increasing,
suggesting further falls ahead.
Prime London Markets
Source: Cushman & Wakefield Research / LonRes
Area definitions for report: PCL = W1H, W1U, W1G, W1B, W1S, W1C, W1K, W1J, SW1A, SW1Y, SW1P, SW1H, SW1E, SW1W, SW1X, SW7, SW3, W8. OPL = NW3, NW8, W2, W9, W11, W14, SW6, SW10.
OUTER PRIME LONDON (OPL)
Capital values in Outer Prime London also remained flat in April
after their early year falls and are currently -1.2% down for the
year, with rental values following suit at -1.2% down on April 2016
levels. Rental values look set for further falls in the coming
months as the gap between asking and achieved rents opened
up considerably from the month previous, suggesting falling
demand levels.
From a sales transactions perspective, April volumes were down
on both the month and year. It is the latter statistic that is of the
greatest importance though as April 2016 was the month the 3%
stamp duty surcharge was introduced and was one of the quietest
months in recent history for this reason, making this fall more
striking.
Indicator
M-on-M
(Mar-Apr)
Y-on-Y (Apr-
Apr)
Sales
Transactions
-57% +75%
Capital Values +0.10% -0.43%
Average sale
discount %
+8bps (5.69%) +170bps
Rental Prices -0.18% -1.50%
Average rent
discount %
+16bps (4.71%) +94bps
Indicator
M-on-M
(Mar-Apr)
Y-on-Y (Apr-
Apr)
Sales
Transactions
-34% -14%
Capital Values -0.01% -1.21%
Average sale
discount %
+2bps (4.88%) +167bps
Rental Prices -0.15% -1.17%
Average rent
discount %
+84bps (3.46%) +32bps
-6.0%
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
95.00
96.00
97.00
98.00
99.00
100.00
101.00
102.00
103.00
Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17
Cushman & Wakefield Prime London Market Index
(April 2016 = 100.00)
PCL Capital Values (LHS) OPL Capital Values (LHS) PCL Average Discount (RHS) OPL Average Discount (RHS)
6. 5Cushman & Wakefield | Residential
OVERVIEW
The introduction of tighter mortgage affordability tests in 2014, a greatly reduced number of high loan-to-income
mortgages, and a higher proportion of fixed rate mortgages, go some way to ensuring that the market is now far more
resilient to sudden shocks, such as an unexpected interest rate rise than previously. Nearly half of all borrowers are now
on fixed-rate mortgages, with just under 90% of new mortgages fixed. This should ensure that any increase will be
absorbed into the market over a period of years.
BUY-TO-LET LENDING
The gradual recovery of Buy-To-Let (BTL) activity
continued in the first quarter of the year with the
number of mortgage approvals for BTL purchases
increasing 4% on Q4 2016, defying a number of
forecasts. Approval levels are currently 15% below
pre-surcharge levels and although the gradual
removal of BTL tax relief on borrowing costs will
dampen demand, we would expect the on-going
rebalancing of levels following the distortion in activity
caused by the introduction of the 3% stamp duty
surcharge on second home ownership to keep
quarterly approvals in the 18,00-20,000 range.
Mortgage Market
HOUSE PRICE TO RESIDENT WAGES - TRENDS
As would be expected, when analysing the average resident earning-to-resident wage ratio, the least affordable areas are
all London Borough’s. An interesting trend to emerge when adding the most affordable UK areas is that affordability levels
are heading in opposite directions for these two groups. Affordability levels have decreased in generally higher value/less
affordable areas, whereas the opposite is true of the most affordable areas, where rates of house price inflation under wage
growth have generally made local property more affordable.
Sources: Oxford Economics / Council of Mortgage Lenders
0
10,000
20,000
30,000
40,000
50,000
60,000
Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017
Buy-To-Let Mortgage Approvals
0.0
5.0
10.0
15.0
20.0
25.0
Kensington and
Chelsea
Westminster Camden Hammersmith and
Fulham
Haringey North Lanarkshire Pendle East Ayrshire Blaenau Gwent Burnley
House Price-to-Earnings Ratio
Top and Bottom 5 Areas
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Top 5 Bottom 5
7. 6Cushman & Wakefield | Residential
Author
Lee Layton
Associate Director
Residential - Research
020 3296 4574
lee.layton@cushwake.com
Contacts
Candice Matthews
International Partner
Head of Residential
020 3296 3988
candice.matthews@cushwake.com
Mike Bickerton
Partner
Residential – New Homes
020 3296 3837
mike.bickerton@cushwake.com
Jack Simmons
Partner
Residential - Investment
020 3296 4991
jack.simmons@cushwake.com
Fergus Jack
Partner
Residential - Investment
020 3296 4494
fergus.jack@cushwake.com
Nick Jacks
Partner
Valuation & Advisory
020 7152 5264
nick.jacks@cushwake.com
Jonathan Godfrey
Partner
Valuation & Advisory
020 7152 5760
jonathan.godfrey@cushwake.com
Andrew Palmer
Partner
Residential - Land
020 3296 4033
andrew.palmer@cushwake.com
Daniel McDonagh
Partner
Residential - Land
020 3296 4674
daniel.mcdonagh@cushwake.com