Market Insight - How Times have Changed
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Residential Market Update

Emerging seven figure markets?

The million plus market spread further in 2014.

2014 was a record year for £1millon plus sales, 14,000 homes worth a total of £26 billion tradedhands for £1million or more. That’s a third up on the 11,000 sales in the £1million plus price bracket in 2013 and two thirds more than the 8,900 in 2007.

Growing prices, particularly in London and the South East have put more homes than ever into seven figure territory in 2014. The growth of transactions above £1million in local markets points us to emerging and growing prime areas. In 2014 there were 16 local markets in particular that saw £1million plus markets emerging. Those that saw an increase from just one sale above a million pounds in 2013 to five or more in 2014.

There are three distinct groups on the list. Areas on the fringes of Inner London that are currently on the up, there aren’t many areas like this without £1million plus markets already, so New Cross and Bethnal Green stand out. Markets in Outer London boroughs, some less established, such as Brentford, Harrow and Edgeware which are benefitting f  m a flow of demand from more expensive central areas. And towns in the commuter belt, currently seeing an influx of London leavers, cashing in on prices in the capital while making life stage moves.

The only area on the list outside of London or the commuter belt is Sudbury, in Suffolk. Sudbury is benefitting from a mix of spill over from Cambridge, and the seemingly constant advance of London leavers looking further afield to get more for their money. Sudbury’s stock of classic Georgian buildings seems to be proving particularly popular with incoming buyers.

While the upcoming election and the threat of a mansion tax makes it difficult to chart the path of the more expensive £2million plus markets over the rest of 2015, it is likely that we’ll see the emerging £1million plus areas continuing to grow. House prices are forecast to rise in 2015, albeit at a slower pace of 4%, and we expect the tide of London leavers to continue to push demand into prime markets across the rest of the country. The result will likely be more areas outside of the traditional London commuter belt, like Sudbury, making an appearance in next year’s list.

Top Emerging £1million plus markets in 2014

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Another record, rather telling of the London market, is the biggest increase in Londoners purchasing homes out of the capital. High prices and worries about the London market have seen the numbers of home owners cashing in on the capital increase by 70 per cent in the first half of the year compared to 2013. The London market has cooled, price growth is stalling and the outlook for activity looks somewhat uncertain. It’s London’s records that have contributed to the shift in the market. High price growth has strained affordability, even for some of the wealthiest households, stories of market excesses have lead the BOE to wield Macroprudential regulations and sentiment has declined accordingly. The London market has overshot, and is due for a period of sustained calm. The heat has instead moved out to the country.

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Adding up

Rental yields are likely to make up a greater proportion of total returns for landlords in 2015.

Returns from buy to let investments fall into one of two categories. Income from rent paid to the landlord by tenants and capital appreciation from growing house prices, adding these two together gives the total return for any given year. While these figures are gross, so don’t account for a landlord’s costs, they provide a useful way to understand how landlords’ returns are made up and how they will likely change in future years.

2014 saw average total returns increase to 12 per cent, from 9.3 per cent in 2013. The increase was driven by accelerating house price inflation, prices in 2014 grew by 6.7 per cent across England and Wales versus 4.3 per cent in 2013. Gross yields on the other hand fell slightly as house price growth outpaced rental growth. Average gross yields in 2014 were 5.3 per cent versus 5.7 per cent in 2013.

Market Insight - Figure 1

Given total returns were driven by price growth in 2014, the areas with the most price growth saw the highest total returns. Despite yields in London being lower than any other region, at 4.7 per cent, total returns in 2014 were the highest of any region reaching nearly 20 per cent. Total returns were lowest in the North West, at 8.5 per cent, the area with the second highest yields.

Hamptons International forecasts house price growth to slow in 2015, so total returns will likely fall. House price growth and rental growth is forecast to be roughly equivalent, which means yields should remain stable over the next two years. Total returns in 2015 are forecast to average 9.3 per cent, down from 12 per cent in 2014.

Market Insight - Figure 2

With lower house price inflation forecast, income generated from the tenancies, will make up a much greater proportion of total returns in 2015 and 2016, shifting from less than half of the total return to nearly two thirds. This means managing income by keeping voids and arrears low will be particularly important areas of focus for landlords over the next two years. But with wage growth picking up against the backdrop of a growing economy, the risk of arrears is falling and the overall outlook is strong for incomes.

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The number of homes bought by renters has fallen by a third since January. As the sales market has taken pause, so has the flow of tenants from the rental market.

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