This is the highest level on record in Zoopla’s dataset, which goes back to 1959, if you exclude flash points during the 2020 housing market shut down and between 2008 and 2013, just after the banking system’s near collapse.
The figures emphasise the strain fast-growing house prices has put on ordinary households. Rising values have made it both harder to be a first-time buyer and harder for existing homeowners to upgrade. The gap between the average first-time and second-step home has gotten significantly wider.
Moving costs have also increased as properties were pushed into higher stamp duty bands. In the year to April, there was a 47pc increase in stamp duty bills, an extra £1,587 per home mover, entirely down to inflated house prices.
Lower-income buyers are already struggling. The last time the gap between first and second homes was so great was during another period of economic stress, following 2008. Although this time, the British economy is not grappling with a global financial crisis – that is likely still to come. CEBR has forecast the UK will enter a recession this year.
This will bring more risks for the housing market, which has been underpinned by extremely high levels of employment.
And then there’s the cost of living crisis
It is the lower end of the market that is driving the decline of the market. Average priced and cheaper properties have seen the biggest drops in competition as the cost of living crisis erodes people’s buying power.
The largest slowdown has come in properties worth between £250,000 and £500,000. The share of properties that attracted three or more offers fell to 36pc last month, down from 41pc in May 2021. For properties worth less than £250,000, the share fell from 40pc to 36pc.
Max Armstrong, of North East Property Investment, a buy-to-let specialist, said the measures followed years of policy changes that had made buy-to-let less profitable and came alongside forthcoming minimum Energy Performance Certificate targets that could cost landlords up to £10,000 per property. “There is a worry that there will be a cumulative effect that, when you throw in the upcoming EPC requirements and the reduction in tax relief on mortgage interest, will push small landlords out of the market,” he said.
For Jess Dene*, 51, and her partner, the burden is already painful. The couple are self-employed and have built a portfolio of seven properties in the South West as their retirement fund.
“We didn’t have any money until we were in our 40s and by then it was too late to start a pension,” she said. “Our only option was property.”
But the Government’s buy-to-let crackdown and soaring house prices have already pushed back their plans. “Our aim was to have a pre-tax monthly rental profit of £5,000. We were at £3,500, but that has dropped to £3,200 following the interest rate rises. For two people, that is no longer sustainable.”
A raft of previous measures, such as new requirements for electrical checks, have already squeezed profit margins, said Ms Dene. “It used to cost £75 to renew a tenancy agreement. We just renewed one and it cost £900. The red tape costs so much money.” She is worried that a requirement for all properties to meet new minimum standards will bring additional costs in the form of paying for checks and certification.
Sarah Coles, of the investment company Hargreaves Lansdown, said: “Landlords have been cashing in and moving on as rising costs and a tougher regime persuade them there are easier and more profitable ways to make money.”
Those who sell up will get hit by inflation if they keep their savings in the bank, so former landlords could instead turn to the stock market. A stocks and shares Isa will allow them to invest £20,000 each year free of tax. Self-invested personal pensions generally have an annual contribution limit of £40,000 but allowances can be carried over for three years. Funds offer greater diversification of risk than investing in individual shares, said Ms Coles.
A Government spokesman said: “Good landlords have nothing to fear from our rental reforms, which will give tenants greater security to challenge unreasonable rent rises and poor practice. We are strengthening the grounds that landlords can use to repossess their homes where there is legitimate reason.
“We have consulted with landlords and will continue to work with them as we prepare legislation.”
Homeowners can also benefit from a residence nil-rate band of £175,000 on top of the nil-rate band, if they are passing their primary home to a direct descendant.
This threshold has increased with inflation since it was introduced in 2017, but the Chancellor last year announced that it will be frozen until 2026. This means there will be no allowance for the fact that in April, house prices climbed year-on-year by 12.4pc.
Julia Rosenbloom, of Evelyn Partners, a wealth management service, said: “Given that the nil-rate band and residence nil-rate band have been frozen until at least April 2026, many more will fall into this tax trap.”
Mr Sunak has also frozen the thresholds for income tax, capital gains tax and the pensions lifetime allowance, costing taxpayers thousands in a phenomenon known by economists as fiscal drag.
The inheritance tax is frozen until 2025-26, meaning a family paying tax on a £600,000 estate will pay £13,500 more by the end of the period than they would if it had risen with inflation.
The fresh calls for tax cuts came as HMRC data showed that the difference between the total amount of tax expected and that which is actually paid, was £32bn in 2020/21.
Failure to take reasonable care, criminal attacks, non-payment and evasion were among the main reasons for the “tax gap” in 2020/21 in terms of behaviour.
In terms of customers, small businesses were responsible for nearly half of the tax gap, at around £15.6bn, according to HMRC’s data.
Criminals accounted for £5.2bn of the gap, while medium-sized businesses made up £3.9bn and large businesses accounted for £3.6bn.
HMRC’s publication excluded estimates of error and fraud in the Covid support schemes.
The latest estimate from the Business Department is that, in total, £4.9bn of taxpayers’ money will be lost to Covid fraud.
The scale of the fraud has already led to the resignation of Lord Agnew in January. He said the management of fraud during the pandemic had been “nothing less than woeful”.
As inflation grinds higher, the search for investments that can keep up takes on greater urgency. We’ve covered some of the individual stocks that look equal to the task in other columns, but which investment trusts will preserve the real value of your money?
Savers have a number of options. Some trusts explicitly have this aim and we have tipped a few in recent columns; they include Ruffer Investment Company, Capital Gearing, BH Macro, RIT Capital Partners and Personal Assets. What these trusts have in common is the aim to preserve capital. What about investors who need income? Where can they get dividends that keep pace with inflation?
There are certain “equity income” trusts that can boast 50-year records of consecutive dividend increases. Impressive though this is, Questor wonders whether these trusts will be able to raise their divis in line with inflation when it is in double digits. They would need their holdings to increase their own dividends by that degree, which looks optimistic.
We need then to turn to other assets and the obvious choice is property. Real estate has several advantages. First, tenants have a legal obligation to pay rents, whereas dividends are discretionary. This makes rental income more resilient in troubled times, which will prove valuable if, as many fear, we have to contend not only with sky-high inflation but with a recession at the same time.
Second, many property leases stipulate that rents can only go up, not down, and often they must rise in line with inflation. However, we must be careful about our choice of property investment trusts. For a start, it’s no good having contracts that specify upwards-only, inflation-linked rent reviews if a recession or “stagflation” forces tenants into bankruptcy. So we need defensive parts of the market.
Next, inflation-linked rental contracts need careful scrutiny, as many cap the increases; 4pc is a common limit. These contracts were drafted in an era when inflation of even 5pc would have seemed a distant prospect, never mind the 9.1pc figure for May announced yesterday. Happily Questor has found a couple of property trusts whose contracts with tenants include no cap on the inflation link.
Triple Point Social Housing Reit is one. Its properties are leased to housing associations that house vulnerable adults and rents are backed by the state, so the income is secure.
While there are no caps on rent rises in its contracts, we must acknowledge, as its managers did last year, that in practice housing associations might struggle to pay the full increase at very high levels of inflation. That said, the recent 5pc rise in Triple Point’s dividend suggests that the associations are not struggling so far at least.
Homeowners typically have a gross annual income that is 29pc higher than that of private renters. Those on higher incomes also hold the bulk of the £180bn in additional savings British households accumulated over the pandemic.
The new dominance of fixed-rate mortgages will insulate the market from much of the immediate pain of interest rate rises, Mr Arnold added. In 2021, a fifth of mortgages were on variable rates, down from 70pc a decade earlier.
A rise in both outright homeownership and renting also means fewer households are exposed to the mortgage market at all. In 2005, 40pc of households had a mortgage, compared to 30pc in 2019-20.
Martin Beck, of the EY Item Club, said: “Interest rates have become a much smaller risk factor to house prices than unemployment.”
Unemployment is a key lead indicator for the housing market because it filters directly into forced sales. If people lose their jobs, they can no longer afford their mortgages and they have to sell up quickly. This is a looming risk as the prospect of a recession grows.
The Centre for Economics and Business Research, a consultancy, has already forecast a technical recession, anticipating two consecutive quarters of GDP this spring and summer. It expects a corresponding rise in unemployment from the 3.8pc recorded in the three months to April, to 4.3pc by the end of 2022.
Mr Arnold said: “If a slowdown in the economy brings a rise in unemployment, that could trigger a decline in house prices.”
The cost of living crisis could also feed to the wider housing market in other ways. If tenants cannot pay their rent, landlords could be forced to sell, which in turn could depress house prices, the report said.
David Fell, of Hamptons, said: “As a crude rule of thumb, a rate rise of one percentage point today exerts about twice the pressure on mortgaged household finances as the same rate rise would a decade ago.
“The sale of house price growth and mortgage debt taken on by households means that fairly limited base rate rises by historical standards have the ability to add significant pressure onto household finances.”
Bank Rate rises today will also have a higher impact because buyers have become accustomed to ultra-low rates. For the last 13 years, the Bank Rate has been below 1pc. The move into a higher interest rate environment is likely to have a much bigger impact on market sentiment, particularly in the context of the cost of living crisis, when buyers are seeing bills for food, energy and fuel soar.
The Bank Rate would need to rise to 7pc to have the same impact on household finances as the 17pc Bank Rate recorded in November 1979, Hamptons found.
With a 7pc Bank Rate, the average first-time buyer would have to spend 66pc of their monthly salary to cover a mortgage on an average home. At the peak of the Bank Rate in 1979, the share was only 63pc.
Lewis Shaw, of Shaw Financial Services, a mortgage broker, said: “We have a generation of homeowners that have never seen a typical base rate or the mortgage rates that flow from them. This means their frame of reference will now need to adjust and we all know that can be difficult.”
A major UK law firm is reviewing its office space in London’s ‘Walkie Talkie’ skyscraper as home-working habits persist following the pandemic.
Manchester-based DWF, which is the UK’s largest listed law firm, has hired a consultancy to review its property footprint after deciding that Covid has permanently changed working habits, according to sources.
The review could include slashing the number of desks it currently occupies at its London headquarters in The Fenchurch Building, dubbed the Walkie Talkie, which was once crowned Britain’s ugliest building.
The firm, which has 30 offices globally, moved into the building in 2014. At the time, it took out almost 43,000 sq ft of space, leasing all of the 32nd floor and part of the 31st – enough for its staff at the time with further capacity for future hires.
DWF, which is run by legal veteran Sir Nigel Knowles, remains one of the few listed law firms in Britain after rival Mishcon de Reya abandoned its long-anticipated plans to float on the stock market earlier this month.
Its potential downsizing comes as companies across the country are considering reducing or closing expensive office space, as few workers settle back into full-time office life more than two years after the first lockdown.
A study published earlier this month found that most Londoners believe they will never return to the office full-time, with six-in-10 staff in the capital still working from home at least once a week.
Ex-government adviser Mark Kleinman, a professor of public policy who worked on the study, said he was surprised that respondents showed such an “attachment” to home working “regardless of politics, age [and] seniority” as well as personality type, with little difference between introverts and extroverts.
The research, from the Policy Institute and King’s College London, also found that few agree with Boris Johnson’s criticism that working from home is inefficient because people wonder “very slowly to the fridge, hacking off a small piece of cheese” and forget what they were doing. Just 16pc of people agreed that home workers don’t work as hard as those who commute in.
Electric vehicle infrastructure is relatively well-developed in central London, but in the suburbs the shortfall is acute. While in Westminster there are 2.5 electric vehicles for every public charging point, in Dacorum in Hertfordshire, the ratio is 57. Similarly in Elmbridge, Waverley and Mole Valley in Surrey, the respective ratios are 51, 46 and 45.
Lucian Cook, of Savills, said places where electric vehicle ownership greatly outnumbered charging points would see the biggest impact on home values.
He said: “As the gap between demand for electric cars and public charging points grows, we can expect to see homes that offer private charging provisions to come at a premium.”
Charles Davenport, of Knight Frank estate agents’ in Elmbridge, said off-street parking was becoming a deal-breaker for buyers with electric cars.
He said: “We had a house in Cobham and the couple looking at it had an electric car and they said sorry we can’t because there is no off-street parking and it is absolutely essential for us.” The biggest charger shortfalls are all in the extended London commuter belt in the South of England. Other hotspots include Tandridge and Woking in Surrey, as well as Reigate and Banstead, St Albans and Sevenoaks.
In two years, the combined number of electric cars has surged by 176pc, while the number of charging points has increased by only 72pc.
At the end of 2021, there were 14.75 electric vehicles for every charging point across the UK, compared to 6.35 at the end of 2019.
Thousands of homes near the New Forest and Chilterns have been blocked by new rules that ban building because it might increase the number of people walking in the nearby countryside.
About 15,000 homes near the New Forest have been put on hold by advice from Natural England, the Government’s nature adviser, that they are likely to increase visitor numbers.
The block, which was introduced after a Government-backed report, has been copied in the Chilterns, stopping plans to build a further 20,000 homes.
Councils in Winchester and Dorset are considering similar moves based on Natural England’s advice, and housebuilders fear the phenomenon could spread across Britain, putting on hold plans for thousands more new homes.
A report by Government-funded consultants found that a development of homes in six boroughs within 8.5 miles of the New Forest could increase the number of visitors and dog walkers. Conservationists say more walkers could threaten populations of birds such as the Dartford warbler and nightjar.
Natural England elected to extend the block to nearby Fareham, contrary to the advice from consultants, prompting the council to complain.
“Preventing these new homes being built because some of their owners might visit national parks and forests 14km from their new homes clearly defies all logic,” a spokesman for the Home Builders Federation said.
“We face an ever-worsening crisis of housing affordability and a difficult economic outlook, so giving anti-business quangos and their consultants carte blanche to scupper investments and threaten livelihoods seems particularly unwise right now.”
Allison Potts, of Natural England, said. “[Our] role is to help local authorities take into account the potential environmental impacts of the proposed developments, when reaching a decision on planning permission.”
Buy-to-let yields have hit a record low, fuelling fears that property investors will sell up. Landlords could soon turn a loss as higher interest rates bite, while the Government’s buy-to-let tax crackdown further amplifies the pain of soaring mortgage costs.
Nationally, gross rental yields are already at a record low of 4.38pc. This is because house prices have climbed more quickly than rents.
Research consultancy Capital Economics has forecast that by the end of 2022 yields will hit a new low of 4.26pc. As interest rate rises push up landlords’ outgoings, next year the margin between rental income and mortgage costs will become the most squeezed it has been since the financial crisis.
The Bank of England’s decision to increase the Bank Rate to 1.25pc will cause the average net profit on a new buy-to-let property to fall by 15pc for a landlord who pays higher-rate tax, according to Hamptons estate agents.
In London an investor who pays higher-rate tax will see their net profit fall by £840 a year – 29pc less than before the rate rise.
“It will only take the Bank Rate to reach 2pc before the average landlord on higher-rate tax would see their profit more than halve,” said Aneisha Beveridge of Hamptons.
Capital Economics has forecast that the Bank Rate will hit 3pc next year, but a typical buy-to-let will be loss-making much sooner.
An average landlord on the higher rate of tax will see their investment turn a loss if the Bank Rate hits 2.75pc. At this point, a typical buy-to-let mortgage rate would be 4.11pc, meaning they would lose £97 per property per year. At 3pc, their annual losses would jump to £403.
London landlords will be hit hardest, said Ms Beveridge. “Here, profits would fall by 59pc if the Bank Rate rose to 1.5pc,” she said. If interest rates rise to 2pc, a typical London landlord will lose £501 a year per property. At 3pc, the yearly loss would be £2,180.