Stamp duty reform, announced in December 2014, continues to weigh on activity and price growth at the top end of the market in England and Wales while in Scotland the new Land and Buildings Transaction Tax (LBTT) is also affecting the market.
Indeed, the level of LBTT for sales between £750,000 and £2 million is on average 55% higher than the equivalent Stamp Duty payable across the rest of the UK, the Prime Country Winter Review from real estate firm Knight Frank says.
Meanwhile, price growth in prime town and city markets including Oxford, Bath and Bristol has been relatively robust and farmland values remained steady in the third quarter of 2015 as the market enters a period of equilibrium.
According to Knight Frank indices, prime property values for homes located in town and city markets have risen by 26% since 2005 and are now 3% above their 2007 peak. In comparison, more rural properties have risen in value by 7% since 2005 and remain 13% below peak levels.
Over the past year this outperformance has continued. This has been particularly evident in prime cities with strong commuting links to London, notably locations such as Oxford, Bath, Bristol and Winchester, the report explains.
‘In recent years, a return to economic growth has given a number of these towns and cities an additional lift with an improving business environment helping contribute towards higher demand for housing as people relocate to an area for work, or look to move up the ladder locally,’ said senior analysts Oliver Knight.
He pointed out that a recent report from the British Bankers’ Association noted that banking jobs are shifting from London to some smaller regional locations, with particularly strong growth in Tunbridge Wells, South Gloucestershire, Chelmsford and North Tyneside, all of which outperformed London in terms of employment growth over the last year.
The report explains how in 2005 there was quite an equal distribution of prime sales across the country, but by 2014 there had been changes across the Midlands, North West and Yorkshire as transactions clustered more around urban centres.
A closer look at the data shows that while the volume of sales fell by 13% across the country between 2005 and 2014, in key town and city markets sales volumes at the top end of the market increased by an average of 25%.
Looking ahead, the trend for urban living is expected to continue. ‘As the economy continues to recover and house prices outside of London show further growth, the trend for more London buyers to move will gain more traction and this will boost the ripple effect of house price growth from the capital,’ said Knight.
‘Infrastructure improvements, such as faster road or rail connections or the creation of new transport hubs will enhance the appeal of these areas further still, but may also have the effect of opening up the more rural markets once again,’ he added.
Scottish country house prices fell by 0.7% between July and September, the first time that prime prices have fallen on a quarterly basis in over two years. Annual price growth in the Scottish country house market slowed to 0.6% over the year to September 2015.
‘In the medium term, activity across the prime market in Scotland is likely to moderate slightly as the market continues to adjust to the higher rates of LBTT. The Holyrood elections scheduled for next May and a consultation on council tax reform also have the potential to cause some uncertainty in the market,’ Knight said.
The average value of bare agricultural land in England rose by just 0.5% between July and September, according to the latest results from the Knight Frank Farmland Index. Although this represents the eleventh consecutive quarter of growth and means values now stand at a record £8,306 per acre, it also marks the beginning of a period of potential price stability
Over the past five years farmland with growth of 48% has outperformed many other asset classes, including gold which has fallen by 10%, and has even kept pace with London’s luxury residential market which has grown by 43%.
‘This strong performance brought new buyers into the market, including a wide range of investors from both the UK and abroad. However, potential purchasers, particularly farmers, have gradually become more considered in their approach to acquisitions since the beginning of 2015,’ said Andrew Shirley, head of rural research at Knight Frank.
‘This is partly due to a prolonged period of low commodity prices, but also reflects the perception that the market was reaching a peak. Availability of farmland has also increased. So far this year around 20% more land has been advertised publicly compared with 2014. As a result, what we are experiencing now is a market that is much more in equilibrium in terms of the balance between supply and demand,’ he explained.
Prices are unlikely to fall or rise to any great extent over the next few years because buyer demand remains strong, albeit cautious, he pointed out. ‘Supply, while up on the previous year, is also low in historic terms and the market is unlikely to be saturated. A sudden upwards shift in interest rates could put some pressure on more farmers to sell up, but the indications from the Bank of England seem to point to a gradual rising of rates starting in the second half of 2016,’ added Shirley.
‘Price variability on a local, as well as a regional level, is also likely to grow as a dominant theme of the market. Extremely high prices will continue to be paid for large blocks of top quality land where a number of buyers are in the running. Where interest is more limited, vendors will need to temper their expectations,’ he concluded.
