Uk Market
The UK property market:
Buoyancy in the UK market:
There are risks associated with any investment class and property is no different.
However, in the UK we have a far greater chance of success than the vast majority of the rest of the world. This is due to the strong property ownership rights which we enjoy, buoyancy of the market and long term demand based on an acute shortage of dwellings.
Average growth in UK Residential property has been 10.3% annually according to the Halifax building society over the past 40 years (of which property has risen 36 out of the 40 years).
On average property in the UK has doubled in value every 7-10 years. This historical data is great news for the serious property investor.
Market Movements:
A question many of our investors ask us is what would happen to their portfolio should the market crash such as in the late 80s?
Our view is that any serious investor would want answers on topics like this. We would encourage you to come to us with any questions that you have. Once answered your knowledge and confidence will grow.
Unlike with equities, the majority of the UK’s housing stock is not held by investors. It is predominantly a residential owner market (91% of mortgages taken in 2006 were taken out by people on their own homes).
This creates a situation where people cannot afford to sell their property and move if the value has gone down since its purchase. This forces an effective floor on prices below which they cannot afford to move.
Rents actually firmed during the last crash as more people became nervous about buying, therefore putting buying decisions off, choosing to rent instead. History has taught us that the value of the property will always return and then increase over time meaning that we can again start re-mortgaging and taking tax free money.
So the moral of the story is hold, don’t panic & Don’t Sell!
Stability:
Although property values dropped significantly during the late 80s their price swings are rarely matched by the values of equities on the stock market.
The less liquid nature of property (its ability to be bought and sold quickly) also reduces price volatility over stocks, making prices more stable. If you have invested in a company which is on a permanent decline or goes bust you may lose most or all of your money permanently.
Property does not work this way.
Values have always returned in the long term. Unlike with equities, mainstream banks’ willingness to lend on property illustrate this point well. Large institutions have been willing to lend large amounts of money secured on property as they understand the solidity and stability of the value of property, and their ability to recover monies they have loaned on it.
In order to get a ‘crash’ we would normally need to see 2 economic changes rather than, for example, just a big interest rate rise. A secondary factor such as a sharp rise in unemployment would, according to many experts, also need to take place. Neither are currently forecasted by serious commentators.
Affordability in the Market:
Another common question we get asked relates to the relationship between incomes and house prices which are at historically high levels at the moment.
People often question how prices can rise any further without a substantial rise in incomes, which is worth covering here.
However, this measure does not take interest rates into account. The measure which we think is more applicable is the multiple of house prices to incomes, whilst taking the interest rate into account. In effect the percentage of income homeowners pay that is taken up by mortgage payments on average.
This figure is still relatively low due to low interest rates, meaning that borrowers still have a good proportion of their income available after mortgages have been paid.
There is also evidence to suggest that people are living in smaller and smaller properties in this country as the availability of property decreases and prices rise. This has forced the market to adapt to provide ways in which first time buyers can afford to get on the ladder.
Markets always adapt as they are doing in the UK, which contradicts the common misconception that this 'can't go on any longer.'
Vendor paid deposits, Micro flats, shared ownership and friends buying together are further examples of ways in which people can still access the market despite higher prices.
Mortgages are now being offered over a longer period as a natural response to reduced affordability. The old maxim of a 25 year mortgage is now being stretched with more than a quarter of lenders offering up to 40 years.
The average size of homes in London and Tokyo are extremely small compared to the rest of the world, but this wasn’t always the case.
To show an example of market adaptation, look at the change in residential developments: smaller plots, gardens and plan footprints are compensated by additional storeys.
There was a shift as the demand for land and property rose to living in smaller properties as the price per square foot rose. This has allowed prices to carry on rising whilst not pricing people out of the market, meaning that the people who have already bought benefit from increased property values.
And remember we live on a very small island. Land will always be at a premium, especially when compared to countries like the US, which should keep driving the price of property upwards, enabling us investors to get long term returns.
Full Progressive Market Analysis:
For a full Property Market Appraisal that you can print and read from the comfort of your own armchair click here for our Market Analysis media pack
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