LSL Property Services : Aug 16 House Price Index

Under embargo until 00:01 Tuesday 13th September 2016 August2016

• House prices continue to grow
• Cheaper London boroughs continue to surge
• Luton, with average prices up 15.6%, and the East more widely, continue to top the tables for growth

House prices continued to grow in August - although at a slower rate than in previous months - with average house prices now standing at £292,921 meaning the average homeowner is sitting on £12,101 more equity than this time last year.

Transaction levels present a mixed picture: although activity in England & Wales was lower than seen at this time last year, levels in August were up 2.6% on July. It is estimated that there were 78,000 housing transactions in August, with levels now closely tracking those of 2013 for the last three months.

Both price and transactions are recovering from a slump following the spike ahead of the 3% stamp duty surcharge introduced on second homes and buy-to-let properties in April 2016. Following a big increase in March as people rushed to beat the rise and a sharp crash in April, prices have settled. They continue to grow slowly, just slightly below the trend before the change. Transactions, too, have followed a similar pattern.

Turning attention to London, whilst many predicted a slowdown in the capital following the Brexit vote, the market was already contracting to a certain extent, and although transactions and price growth have slowed in the most expensive boroughs, more affordable areas have seen impressive annual increases. This includes Lewisham (18.7%), Barking and Dagenham (18%), Waltham Forest (16.3%) and Bexley (16%). Average annual increases in London over the previous three months were 4.6%.

This pattern is being repeated more widely, with more affordable areas across the country performing well. Average growth for England and Wales is 5.3% while a large number of unitary authorities continue to see double-digit growth, led by Luton, with annual average prices up 15.6%, Slough (14.6%), and Thurrock (14.3%). As a result, the ONS UK House Price Index, which effectively balances out the changes in affordable and high end property in London, shows good growth in its latest figures, while others, giving greater prominence to declines in high value properties, suggest a weaker picture.

Whichever way we look at it, though, the slowdown in top-end property seems likely to be mostly the result of high stamp duty land tax (SDLT) rates on properties valued over £1.5 million, which were increased in December 2014. The April 2016 surcharges then added to this. We wait to see with interest what the new government has in store for the market with the Autumn Statement.

Adrian Gill, director of Your Move and Reeds Rains estate agents, says: "The new market data shows us once again that there is no single housing market but the sentiment, we believe, remains singularly positive - there is demand for affordable property and there are people who, bearing in mind the transaction volumes recorded, have the appetite to make a move.

"To maintain this momentum, however, it will be necessary for the government to provide continued support to consumers, housebuilders and the property industry as a whole and ultimately ensure that there are enough houses - and finance available - to help people realise their dreams of home ownership. Whether this will come when the Autumn Statement is announced is yet to be seen but no doubt many will hope it is yet again strongly positioned on the political agenda."

NB: The LSL/Acadata house price index incorporates all transactions, including those made with cash.

For a more detailed market analysis by Acadata, see page 3.

House price index: historical data

Table 1. Average House Prices in England & Wales for the period August 2015 - August 2016 link to source Excel

The Acadata commentary by Peter Williams and John Tindale

In August, house prices rose by £224, or 0.1%, to an average of £292,921. This price is still £3,600 below that recorded in March 2016, immediately prior to the introduction of the 3% stamp duty surcharge and the subsequent Brexit vote. On an annual basis, the rate of growth of house prices in August 2016 for England & Wales fell to 4.3%, down from the 5.3% seen in July. This is the sixth month in succession in which the annual rate has fallen, and represents the lowest annual rate recorded since August 2013, when prices rose by 3.9%.

One of the main reasons for the sluggish performance in house price growth overall is Greater London, where prices have been receding for the last six months. As we discuss on page 9, it is mainly the most expensive boroughs in London that are seeing prices fall, while the more affordable boroughs around the periphery of the capital continue to see extensive price growth. Much of the decline in the central London areas is a fall-out from the high rate of SDLT chargeable on properties valued in excess of £1.5 million, which was introduced by the former Chancellor George Osborne MP in December 2014. This high tax rate has been further added to by the 3% surcharge in SDLT on second homes and buy-to- let properties, introduced in April 2016. This market was contracting prior to the Brexit vote with - to date at least - hardly

Annual House Price Growth, including and excluding London & SE

Annual % change in house prices

10.0

9.0

8.0

7.0

6.0

5.0

4.0

3.0

2.0

1.0

0.0

including London excluding London excluding London & SE

any change in direction once the outcome of the vote was known.

Figure 1.The rate of annual house price growth in England & Wales, for the thirteen months August 2015 - August 2016. link to source Excel

Figure 1 above shows the annual rate of house growth for England & Wales as a whole, as well as looking at a similar analysis excluding Greater London, and Greater London with the South East. The annual rate of growth a year ago was around 5.0%, irrespective of whether London and the South East were included or excluded. As the introduction of the 3% surcharge drew closer, prices (and as we discuss on page 5 transactions too) climbed to a mini peak, but subsequently subsided to lower levels, with London starting to drag down the average rate of growth for England and Wales as a whole from June 2016 onward.

While we might have hoped to see the impact of the tax changes slowly receding, the market remains muted, albeit with some distinct regional and local variations. We have seen a variety of announcements which support the view of a market marking time, whether it be based on lending figures or transactions. At the same time, we are of course also now working through both the summer holiday and continuing Brexit effects.

In its Inflation Report issued on 4th August, the Bank of England commented that 'forward-looking indicators suggest that both housing transactions and house price inflation may decline further' with agents' expectations of prices at their lowest level since 2011, the balance of sales expectations at its lowest ever level and both the net balances of reported new enquiries and selling instructions falling. According to the RICS survey on which this was based, the negative outlook was likely to continue in the near term, but respondents were slightly more optimistic about the twelve-month outlook, reflecting the underlying and continuing imbalance between supply and demand.

The Bank has highlighted the relatively large costs associated with buying and selling houses and, given the market uncertainty, how some households would delay buying or moving house. Clearly, if the economic outlook is more negative we may see wage growth curbed, and this will impact on the demand for housing. The Bank's own Q2 Credit

The Acadata commentary by Peter Williams and John Tindale

Conditions

survey indicated that increased lending would exist to support any growth in transactions, but the Bank's expectation is that on balance (between unwinding of the stamp duty effect and the impact of Brexit) transactions may remain flat and

house prices will 'decline a little over the near term'. Certainly, this view of transactions taking the strain of all of the uncertainties in the market remains very plausible.

A static or weakening housing market across much of England and Wales is both a negative in terms of what it says about the underlying economy, as well as the capacity to secure the much-needed continuing increases in housing supply. Housebuilders have suffered from the post Brexit vote uncertainties, and though some have seen a modest recovery in share prices, there is a general view that housing output will fall unless government can further underpin the nascent recovery. The new government has set out its continued commitment to supporting home ownership and the housing market, and we must now wait for the Autumn Statement to see what measures might be put in place.

The recent IPSOS Mori index of issues indicated that housing has moved up to the 5th highest priority for respondents, the highest it has been, and this is indicative of the political pressure the government will be under. There is a real fear that it might be tempted to provide more support for demand-side measures which in turn may do more to stimulate prices in the short term; although supply should follow, this might not be focused on the real pressure-points - homes affordable to middle- and lower-income households.

In the interim, we must wait to see how the market settles as we move out of the holiday season into the key autumn period, and as the effects of interventions and immediate loss of confidence as a consequence of the vote trickle through. Expectations have been reduced and uncertainty has increased, and a more muted market has followed. Into this mix then comes the question of how we read the market given the conflicting views generated by the different indices, and not least by the contrasting results which flow from the different averaging techniques being used - for example, the use of the geometric mean or the arithmetic mean. As we discuss shortly, in different market contexts the techniques produce sharply different results. Given that it is these data/indices which may be used to help inform policy interventions over the next few months, we need to understand fully the implications of what is being used. This is not simply an academic discussion.

In compiling the LSL Acadata HPI, our normal practice is to smooth the monthly and annual house prices over a three- month period. This smoothing process is introduced to iron out the irregularities that occur in the house price series over time, and helps to provide a better understanding of the trends that exist in the underlying data. Occasionally however, if one wishes to explore a spike in prices in more detail, it is useful to examine the non-smoothed data, as we do here.

Figure 2 below shows the average house price in England & Wales over the last year on a "non-smoothed" basis, together with a linear trend line for the same period. As can be seen, house prices for August 2015 were below trend, but climbed back up to the trend for the period October - December 2015. At the end of November 2015, the Chancellor announced in his Autumn Statement that a 3% stamp duty surcharge on second homes and buy-to-let properties would be introduced on April 1st 2016. From January 2016 onwards, we can see that prices began to climb above the trend, as the purchasers of second homes and buy-to-let properties moved to bring forward purchases and hence avoid paying this additional tax. In April 2016 the new tax was introduced, resulting in a fall-off in the number of higher-valued properties being sold and, as can be seen in Figure 2, a very readily apparent reduction in the average house price. House prices have remained below trend for the period April - August 2016, with house price inflation becoming more subdued over the last three months, indicated by the slope of the red line being marginally flatter than that of the trend line itself.

Average House Prices in England & Wales (Not smoothed)

August 2015 - August 2016

£305,000

£300,000

£295,000

£290,000

£285,000

£280,000

£275,000

E & W Trend