The UK Residential Market: what’s next?


  • The UK residential market has faced various challenges over the past 18 months and average prices fell by up to 8% in London
  • On the positive side, new political stability, a near-zero interest rate environment, and weak sterling will boost demand in 2016/2017
  • Overall, the post-Brexit uncertainty will soften slowly but sellers need to be more realistic and flexible in their price expectations

The UK residential market over the last two years

Over the past two years the UK residential market has faced various challenges. These include increased stamp duty on homes with a value over £937,000, which has a disproportional effect on the London market, as well as a 3% increase in stamp duty (SDLT) for second homes. Political and economic uncertainty surrounding the EU membership referendum has also had an impact. Markets do not like uncertainty and property is no exception. Savills reports that from August 2014, to immediately prior to the EU referendum, the average price of prime property across London decreased by 1.4% and by 8% in prime central London – this is likely to be in part due to the significantly increased tax burden on high-value homes.

Positive developments; interest rates and policy from the new Prime Minister

On the positive side, the efficient appointment of the new Prime Minister, the Bank of England’s decision to further reduce the interest rates by 25bps to a record-low of 0.25%, and a weakened sterling, are serving to bolster confidence in the UK economy and the property market, despite the threat of a shallow recession to come.

The new Prime Minister has suggested that she will support all tenures of housing not just those for private sale, therefore government-backed schemes such as help-to-buy and local authority/housing association property may benefit from further policy changes. Many hope that she will also reduce the additional 3% SDLT for institutional investors in order to maintain the momentum that is being created in the Private Rented Sector (PRS) sector by these groups. Meanwhile, developers will be keen to ensure that the new government helps to make the planning system less rigid, and therefore speed up and stimulate the development process.

We already have seen some positive signs from the new domestic political stability and the weak currency. Several high-profile deals have been completed post-Brexit, confirming an-underlying market strength and investor appetite. These include two development funding packages for £320m and £500m for tower schemes in London, and over 20 units sold on the launch day for two residential developments in Manchester and East London. In line with this trend, some brokers forecast a price growth rise for the London housing market in the coming years. Among others, Cluttons expects a 3.7% house price growth per annum in 2017 and 2018, before edging towards 4% in 2019 and 4.7% in 2020.

Factors that could influence a slow recovery

Despite these indications of optimism, we expect a slow recovery and there are several clouds on the horizon. Chief amongst these are the many unknowns regarding the future relationship with the EU, including budgetary contributions, the status of any new trading relationship and passporting rights for financial institutions based in the UK.

International house buyers are likely to be more cautious about exploiting the currency-led opportunities given a less benign tax environment than pre-2014, which includes higher rates of stamp duty and greater exposure to capital gains tax. This, together with continuing concerns about the economic impact of Brexit, is likely to mean the market remains price sensitive over the short to medium term.

The outlook for sellers

We believe that sellers need to be more realistic and flexible in their price expectations in the current environment, responding to changes in market sentiment. As reported by Savills in July, early indications are that a relatively high proportion of sellers have already adjusted their price expectations, and there is still demand for good quality, well priced stock. Data compiled by them from a survey of over a 100 agents active in the prime housing market indicates greater caution amongst buyers and highlights the likelihood of a mismatch between buyer and seller expectations in the short term. However, it also suggests that 40% of the sellers were already taking into consideration the possibility of house price falls over the next six months. In addition to this, respondents stated that the vast majority of deals agreed pre-Brexit have been honoured. Where this has not been the case, renegotiations were carried out with a 5%-10% price adjustment.

Our conclusion

In summary, given the many unknowns regarding the future relationship with the EU, we do believe that is too early to make clear judgments about the new shape of the UK residential market, even if the Cluttons’ house price growth forecasts are a strong sign of hope. However, the true strength of the demand is only likely to become clear over the next 12 months. Meanwhile, it is clear that committed sellers need to be more realistic and flexible in their price expectations over the short and medium term. Political stability, low interest rate expectations, weak sterling and solid UK economic fundamentals will determine the longer term outlook.

About Avamore Capital:

Avamore Capital is a special situations lender that provides loans to property traders, property developers, property investors, and other property entrepreneurs. Loan sizes are between £0.5m and £5m with larger loans possible in conjunction with its partners. Avamore Capital provides a flexible approach, quick feedback and very fast drawdown, subject to due diligence.

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