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14th Aug 2018 RICS UK Residential Market Survey: July 2018: Landlord instructions fall as rent forecasts edge up

Landlord instructions fall as rent forecasts edge up

• Lettings market data provides further evidence of the impact of tax changes on BLT supply
• Sales market remains broadly flat at headline level
• Sub £500k continues to show stronger trend as reflected in ask vs sales price gap

The most striking feature of the July 2018 Royal Institution of Chartered Surveyors (RICS) Residential Market Survey is the worsening trend in new instructions in the lettings sector. This was something that was highlighted in the June report on the basis of monthly non-seasonally adjusted data. However, a broadly similar pattern is visible in the preferred indicator (released at a quarterly frequency and seasonally adjusted).

The results show the New Landlord Instructions series in the latest three month period has slipped to a net balance of -22%. This is the eighth consecutive quarter in which this indicator has recorded a negative number, albeit only modestly so on some occasions. (though this is not something that we have This pattern is symptomatic of the shift in the mood music in the Buy-to-Let market in the wake of tax changes which are still in the process of being implemented. Significantly, the drop in instructions is evident in virtually all parts of the country to a greater or lesser extent.

While the implication of this feedback is that the supply of fresh rental stock to the market is increasingly constrained, the Tenant Demand indicator remains resilient. The upward momentum in the latter appears to have slowed in recent quarters but the numbers remain in positive territory at a headline level (+4% in the latest three month period). One consequence of this imbalance is that expectations for rental growth appear to be strengthening once again. Over the next twelve months rents are projected to increase by a little short of +2% nationally but the shortfall in the supply pipeline is more visible over the medium term with a cumulative rise of around +15% (based on three month average of responses) expected by the middle of 2023. East Anglia and the South West are viewed as likely to see the sharpest growth over the period.

Turning to the sales market, the underlying message is little different from that reported in June. The headline Price balance edged up from +3% to +4% in July, following two months when the results were very slightly negative. Meanwhile, the Newly Agreed Sales net balance remained close to zero for the fourth month in succession. These results are consistent with a broadly stable housing market when viewed through the prism of a national perspective. As we have highlighted previously, the feedback to the RICS survey continues to suggest a stronger market in Scotland, Northern Ireland, much of the north of England, the Midlands and Wales. The London Price balance was little changed over the month at -40% but this does represent a shift from the reading of -66% in April. The results for both the South East and East Anglia are consistent with very modest price declines, while the data for the South West points to a broadly flat picture.

It is perhaps no surprise that as speculation built ahead of the August Bank of England meeting (which was to see a quarter point rise in base rates) the headline New Buyer Enquiries series was little changed over the month with a net balance of +2%. The New Instructions measure similarly signalled a flat picture, following two months in a row of very modest increases. We acknowledged, last month, harbouring some doubts as to whether the pipeline of new supply into the sales market would continue to improve in the light of the feedback received on appraisals being conducted by valuers. For the record, the appraisal balance in July was once again firmly negative. As a result, our judgement is that the average inventory on the books of estate agents is likely to remain close to historic lows. This impact of this is visible in both the twelve month sales and price expectations net balances. While the former recorded a reading of -7%, its most negative number since October last year, the latter was much firmer at +25%.

Each quarter, an additional question is inserted into the survey in an attempt to capture the trend in the gap between ask and sales price. The latest set of results tell a broadly similar story to that seen in April and generally reflect the regional skew in the performance of the housing market. So, for properties put on the market at a price in excess of £1m, roughly one in ten are sold at a discount of more than 10%. In addition, around three-quarters of survey participants cite there being some negative gap between the initial ask and eventual sale price. For properties put on the market between £500k and £1m, the comparable numbers show only 2% of respondents seeing prices achieved coming in more than 10% below asking, although a still sizeable 62% of contributors report sales prices coming in below the initial asking price to some degree. Meanwhile, for the mainstream market (homes priced at under £500k), the largest share of respondents note asking prices and sales prices being at the same level. Significantly, the feedback in this area of the market actually shows one in five properties with a completion price above the asking price.