UK property prices, self build and pension transfers
FT Money Show presenter Hugo Greenhalgh and guests discuss the rise in property prices, how to build a house, and the Great British pensions cash-in.
Presented by Hugo Greenhalgh . Produced Lucy Warwick-Ching. Edited by Trixia Abao.
The UK's property market, is it up or is it down? You may be addicted to channel 4's Grand Designs, but would you really want to build your own home? And the Great British pensions cash-in, is there trouble ahead? Welcome to the Money Show, the FT's weekly podcast on personal finance and investing. I'm Hugo Greenhalgh, editor of the FT's Wealth Magazine. And I'll be bringing you this week's Money News in downloadable form. Now we start with that perennial favourite of dinner parties and pubs, what is happening with the UK's property market?
We've heard stories of top-end flats and houses selling for a fraction of their initial asking price. But what does that mean for the broader market? Is your home going up in value or do we face the dreaded spectre of negative equity once more? I'm joined now by Lucian Cook, Research Director at Savills, the man with his finger on the property button. Lucian, thanks for joining us. Now, your forecasts for the property market are out today. What are you predicting for house prices and transactions and have you changed your view significantly from this time last year?
Yeah, so what we've tended to see in the UK housing market is a slowdown in house price growth. That's been most pronounced in London. Parts of the Midlands in the north have been perhaps a little bit more resilient. But they have much more capacity for remaining house price growth going forward. Nonetheless, we're forecasting that there's going to be a bit of a slowdown, continued slowdown over the next couple of years. Uncertainty around Brexit feeding into the wider economy despite relatively low interest rates. Yet, we wait to see exactly what happens later on this morning.
We think the weakest performing region over the next five years will be London. And that really because that is now stretched. It has seen a prolonged period of house price growth. In terms of transactions, we can't see much upside from the GB 1.2 million where the markets are operating at the moment. They are likely to fall in the short term a little bit, perhaps down closer to GB 1.1 million just because of that uncertainty. But the really interesting thing will be the change in the composition of them. And I suppose the big area there is that we're likely to see a further contraction in mortgage buy-to-let buying.
That's interesting. So the story so far has really been about London, as opposed to the rest of the country. So you're expecting a slowdown in terms of prices going up. But also, what's going to happen to the kind of stratospheric rises that we've seen in recent years? Is that over now?
Yeah, I think pretty much. I think it's very difficult to see how in a regulated mortgage environment you can have much more significant growth in London. So what we're forecasting is that house prices across the UK will rise by 14% over the next five years. In London we're down at 7%. And we're working on the principle that those prices might fall by 2% next year as a little bit of the froth continues to come out of that market. And that really reflects the fact that the average deposit for a first time buyer in London is now over GB 99,000. It's like creeping up towards that enormous figure of GB 100,000.
Good grief. That's appalling.
Which is huge, very heavy reliance on the bank of mum and dad, but equally really restricting the level of transaction activity and who can get on the housing market there. But also, the mortgaged home mover. So they've got on the housing ladder, and they're trying to trade up. Really constrained there. The average income for those households is GB 90,000. And that really is a reflection of how London has become stretched in light of house price growth of about 70% over the last 10 years.
So a lot of bad news for the London property owners there. But we're expecting later this morning news from the Bank of England in terms of interest rates. And we're expecting them to raise them. What's this going to mean for property owners, do you think?
Well, I think in the first instance, if we get a 0.25% increase later on this morning, I think that's much more symbolic than anything else. And of course, what we've had in the UK housing market since 2014 is mortgage regulation, which means that when people go to get their mortgage. Thus, their affordability is stressed, building in interest rate rises. So I don't think it puts people into financial stress particularly.
But what it does do is just restrict the amount of mortgage which they're able to get in the future. And I don't think that has a material impact in the short term. Short term, it's much more about general economic uncertainty. But at the back end of the five year period, I think that really will act as a drag on house price growth.
So perhaps some good news for first time house buyers in that sense. If interest rates go up and prices go down, could we see younger people having more of a chance to get on the property ladder, do you think?
Yeah, well, I think what's happened in the last five years in particular is house price growth is seen much more as a double edged sword. So whilst existing homeowners benefit from the house price growth, it increases their financial security, makes them feel much more wealthy, the people trying to trade up the housing ladder will get on and actually perceive house price growth, certainly excessive house price growth, as a bad thing. Now the difficulty, of course, is I don't think it will make it substantially easier for first time buyers to get on the housing ladder. But it won't make it substantially harder for them to do so.
So it's a bit of good news and bit of bad news.
Well, we've got one thing else coming up quite soon which is the budget on the horizon. And it looks as if we aren't going to get GB 50 billion state injection into new housing if Hammond's hints are to be believed. What do you think we might get?
I mean, I think it's really interesting. What we have seen is a real change in political rhetoric around housebuilding. And we have seen the government really nail its colours to the mast and say one of the things it wants to be known for is solving the housing crisis, which I think is a very tall order, but attempting to solve the housing crisis. I think you'll see continued measures to try and promote first time buyers.
They've already obviously put in the additional GB 10 billion for the Help to Buy scheme. You could see further restrictions on the buy-to-let investor. And I would imagine they'll also look at just trying to get house building up. Getting more players into house building, so that might be a medium size and small house builders, housing associations and counsellors, and continuing to free up the planning system to do that.
Now one thing here at the FT we've been following very closely is stamp duty and the possibility that the stamp duty surcharge on buy-to-let and second homes might be raised to pay for a stamp duty cut for first time buyers. This might be painful for landlords. But it sounds politically plausible. What do you think Lucian?
Well, I mean, I think stamp duty, the receipts of which have continued to go north, has become much more politicised. So we saw back in, I think, 2015 the announcement that stamp duty was going to be used to deter buy-to-let investors. And for the mortgage buy-to-let investors, that's worked. Yet if you were to look at total numbers of people who were paying the additional 3%, they've been much, much more robust than the government ever anticipated. So they may well feel that there's a bit more scope to increase that. Essentially, the reason why stamp duty receipts have continued to go north is because of this 3% stamp duty surcharge.
But equally, the government has been under much more pressure to make it easier for first time buyers and for second steppers. But it's also under pressure at the other end of the market for the downsizes, to release the barriers for those. So whereas, previously we've seen increased rates of stamp duty, I think what we might start to see is some stamp duty breaks in amongst that as well.
So some good news there and some bad news also from Lucian Cook at Savills. And you can read about the state of the UK'S property markets in FT Money on Saturday as part of the FT weekend newspaper or catch up online at ft.com/money. Thanks again, Lucian. Now we on the FT Money team have a very special offer for all our readers and listeners.
Would you like to meet columnist Merryn Somerset Webb? The next FT Money reader investment forum will take place two days before the budget on the evening of Monday the 20th of November. And Merryn was discussing her investment outlook with FT's Claer Barrett and John Eley plus Chris Darbyshire from Seven Investment Management. To be held in central London, tickets will cost GB 30 including drinks and canapes. To book and view terms and conditions, please have a look at ft.com/meetmerryn.
We've all watched channel 4's Grand Designs and gleefully sniggered at the ambitions of those who have chosen to build their own homes. The more disasters, the better the show. But could you actually save money by going it alone? And is it really worth all the hassle?
I'm joined now by FT money columnist Lindsay Cook who has taken the plunge and writes in this week's cover feature about building her own home. Lindsay, thanks for joining us. And well, wow, congratulations. Let's have a look at some of the practical pros and cons. Apart from the advantages of getting the home you want, what are the financial ramifications? And is it more or less expensive than buying a conventional new built or secondhand home?
It should be cheaper, especially if you hire separate contractors and one of the family is project manager. That takes extra work. But a property near me in Sussex would have cost 600K to build and has recently been finished for about 450. So that is a big saving. You also get exactly what you want. Whereas, often when you're buying from a property developer, you think you've got a price and then they add some extras when you want a different kitchen or whatever. There's more work. You set exactly what you want. And there's no extras at the fitting-out stage. And essentially, it should cost you about GB 1,500 to GB 2,000 per square metre.
Now we all have tales or heard tales at least of builders and over expensive, running up huge bills. Just quickly, let's have a look at that issue. You say you can save money. But I guess you have to keep very, very tight control on what people are doing and oversee everything. Are the hassles worth it?
They are. I have what I regard as a perfect home. My husband did add about 20 light fittings to the build. But it worked out. You've got to be disciplined. If you're not that disciplined, you can go for one of these prefabricated houses, often from Germany and Scandinavia. There, you detail every element of the spec. The price is absolutely fixed at the time. And then you can't add anything, but nor can they add anything to the bill.
Well, that's more like it in that case. But the government's actually been taking steps to support self builders. And are there specific measures people can take advantage of?
Well, there was the 2011 housing strategy for England, and this is to encourage local authorities to provide development land, suitable service plots for people who want to build their own homes. It's early days. People should register with their local authority. Every local authority will have something online. Register saying you want to be a self builder.
It's early days and not enough people have done it yet. But as soon as there are lots of people, then those councils will have to find some service land. At the moment, according to AMA research who do a report every couple of years, it's the Northeast and West Midlands where the councils are most helpful to self builders.
That's interesting. We'll have a look at that. Some great stuff there and some good support, if nothing else. But what's the process? Do self-builders typically buy and demolish the existing building and then build their own place? Or should they look to buy land then seek planning permission? And is the planning system generally sympathetic to self build?
I would say you've got to allow at least six months if you're going to buy somewhere and then get permission. And you probably go through five iterations of your planning. Because they'll want different things. And each application might cost you more. But it's worth it. There are a few plots with planning permission available, again, close to me. I noticed one yesterday, GB 400,000, and it's only big enough for a three bedroom house. So you're not getting a bargain there. Quite a few people who've got large gardens sell off part of their garden. And if they're sensible, they get planning permission first so it's got better value.
That's a good idea, absolutely.
Others build themselves and move into the new house and then sell their old house. A lot of estate agents are queued up to this. And they will have lists of properties that are usually small, need a lot of work, maybe have a bit of development problems on a large plot. And they sell those and advise people how to get the permission to knock them down, et cetera.
So lots of options there. But also I guess look and tread carefully. Let's go back to the money, which I'm sure most people will be keen to look at and particularly when it comes to mortgages. So what are the options for self builders and can they access the ultra low rates that we currently have at the moment?
They cannot be able to get into those loans straight away. There's usually about 20 lenders. You're often better off going through a broker. You have stage payments, because they won't pay you all the money upfront in case you go off to Puerto Rico and don't build the place. They have to be sure that you can complete a property that somebody else would want to buy. Because if it's worth less than the mortgage, they've not done well for the lender.
Prefab or kit houses are probably best for this. But other properties, and we all see this on Grand Designs, I mean, they're borrowing from all their relatives. That's not how you should do it. Get a loan. It will be more expensive. The payments will be staged. But when it's completed, you then move on to a cheaper loan. You have to be aware though, some of the smaller lenders who specialise in this do have an exit fee if you want to go onto a cheaper loan. So check it out. But the loans are there. And I imagine if the property market is slowing down, they'll want to lend to somebody.
Very, very true. But let's go back to the Grand Designs question, which is why it makes such gripping telly, but what if it goes all horribly wrong and my builder goes bust having received a large chunk of my cash? What are my options? And do you recommend insurance against that?
I do recommend insurance. There are several policies that will cover you if you're builders are going bust. Even the structural 10 year warranty should give you some cover. It may be limited to 100K if the builder goes bust. But they tend to go bust when they've had most of your money. So they don't do it in the early days. And then you can complete. There are other policies with different organisations that are all listed.
You also need public liability, theft and fire cover, if you are project managing yourself. And you just need to be very careful about all those policies. If you want to cover, you've hired a builder, you notice he's probably been bankrupt before, it'll cost you GB 1,000 to GB 1,500 to get some cover to get somebody to pay to finish it.
Wonderful stuff there and very, very tempting, I have to say. But I'm not sure I'd trust a family member to project manage my own self build. But thank you very much there to you, our columnist Lindsay Cook. And you can read all about the troubles and tribulations and the successes in her story now on ft.com/money. And finally, we turn our attention to the pensions transfer market. Under radical reforms to pension rules in 2015, people were given the right to access their pensions pots rather than be forced to buy an annuity, which would have delivered a secure income for life.
Since then, more than GB 50 billion in defined benefit pension payments, often called the gold plated pension, has flowed out of private sector schemes as people have rushed to cash in. Now the regulator is becoming concerned. It has already forced a number of firms advising on transfers to suspend their activities. And our pensions correspondent Jo Cumbo has been investigating reports that members of final salary schemes are being targeted by advisors sometimes using high pressure tactics to drum up business.
I'm joined on the line now by Tom McPhail, head of policy at Hargreaves Lansdown, to tell us more. Tom, let's start with the regulator. What are the issues that the regulator is concerned about in the transfer market?
They're concerned about whether there's consumer detriment there. So they're worried about whether people are transferring money inappropriately. And therefore, under what circumstances that might be happening. Whether the advice processes involved, particularly, are fit for purpose and whether perhaps advisors or the financial services industry generally is being a little overenthusiastic and encouraging people to give up these guaranteed, final salary pensions that they currently hold in exchange for the uncertainty, the greater control of the money-purchase pensions that they are, in some cases, being moved into.
It's interesting, isn't it? Looking at the reasons why people are doing that. I mean, certainly the regulators advice is that most people are probably better off not giving up a defined benefit pension. So why have so many people given up their DB pensions with around 220,000 transfers since 2015?
Well, in some cases there are legitimate reasons for doing this. For example, typically the death benefits available under final salary schemes can be quite restrictive. If you're not married, the pension income entitlement could die with you. So if you have other family members that you might want to pass your pot onto, then transferring out of the final salary scheme into an alternative kind of pension would allow you to do that. Similarly, if you're in poor health, you can draw down on that money much faster for your limited remaining life through a money-purchase pension, through a personal pension, as opposed to having to take the standard income from the final salary scheme until it expires.
So in some cases it may well make sense. But underlying this, there is concern that it is being driven by a more generalised and diffuse desire on people's part simply to take control of their money. This sense that when the money's in a final salary scheme, you can't control it. It gets doled out to you by the scheme. It's outside your control. If you put it in a money purchase pension, it's your pot of money. You can draw on it at will. You can take lump sums out of it. On the FCA, the regulator is rightly concerned that for some people, whilst that might sound superficially attractive, in the long term it won't be in their best financial interest to do that.
Well, quite. I mean, I think a lot of people are seeing the very attractive nature of a huge lump sum that's going to jam today. So are we lining up problems for tomorrow, do you think?
Potentially. And then of course, in some cases people might have particular cash needs that they need to address. So they want to pay off a debt or they have urgent pressing needs. However, that money can only get spent once. And the security and certainty of a guaranteed income for life from a final salary scheme is going to be worth a great deal to people.
Typically, people underestimate how long they're going to live for. And there is a very real concern that even if they don't spend all the money at once, after the money has been transferred into a personal pension, it will get drawn down too quickly. And as people move into later life, into their 80s, 90s, in some cases into their 100s, there won't be money left there to support them.
Well, let's look at a specific example of somebody who might want to transfer and whether it's a good idea. But if someone is worried about the strength of their employer, for example, or former employer, is this a good enough reason to transfer out of the company pension scheme, do you think?
In very extreme cases, it might be. It's interesting to note, the deficits on final salary schemes are already reducing as interest rates start to creep up. The fears of large scale collapse in final salary schemes is diminishing. The department for work and pensions and the financial regulator, the pensions regulator, have both said they are not overly concerned about the long term sustainability of the final salary scheme sector in general. There will, however, be isolated specific cases, such as BHS, very high profile case from a year or so ago. There will be isolated companies where the employer does go bust and where there isn't sufficient money in the pension scheme.
Now, where that happens, there is the lifeboat scheme the Pension Protection fund that stands behind it. So most people will still get most of the pension they're entitled to. If you are a very high earner with a very large pension promise and a final salary scheme and you have immediate concerns that both the employer is about to go bust and that the scheme is in deficit, then that's the kind of situation which might lead you to conclude you're better off getting out. But those are very isolated examples.
All right, let's look at the practicalities. I mean, how can someone know if the transfer is right for them?
The important thing is you have to take advice. And so you're paying a regulated financial advisor to go through the numbers, to look at your personal circumstances, and take a professional view on whether a transfer is right for you. Now as we've already touched on, the regulator is concerned that in some cases that advice could perhaps be skewed, particularly, where the advisor is not charging a fee upfront for their services. Where they're only going to get paid if you do go ahead and make the transfer, what's referred to as contingent charging.
However, if you've paid for professional advice, however that advice has been paid for, then someone has taken responsibility for your outcomes. And if subsequently it turns out that that advice was poor, there may be potential for address. Of course, you don't want to have to end up there in the first place. But to come back to your question, you talk to an adviser. You get professional advice. And hopefully, then you can make a well-informed decision about what's best for you.
And here's hoping we are all creating a generation of Viv Nicholsons, the immortal lottery winner with the phrase, "spend, spend, spend."
"Spend, spend, spend," indeed.
But Tom McPhail there from Hargreaves Lansdown. Thank you very much for joining us. And you can read Jo Cumbo's investigation into the pensions transfer market now on ft.com. Now, have you got a story you would like the FT Money to follow up or a question to pose to our team of financial experts? We would love to hear from you. You can email us at email@example.com. Tweet us @ftmoney or comment on our articles online at ft.com/money. That's all for the Money Show this week. We'll be back at the usual time next Thursday. Thank you, and goodbye.