Investors have long turned to the UK housing market as a safe bet for savings and retirement. UK property has never failed to increase in value over a five-year historical period, and residential property offers the highest risk-weighted returns of any asset class.
However, in an uncertain political environment – with snap elections, unstable leadership and Brexit squabbling – as well as changes to stamp duty land tax and tax relief on mortgage interest for buy-to-let properties, is UK property still a safe bet?
The market remains strong as supply and demand are still unbalanced. This trend is set to continue and will be more pronounced in areas with tight planning controls. Thus, property remains a strong bet in the medium to long term as the fundamental economics of supply and demand are in favour of price inflation.
‘So long as responsible lending continues and there are no significant shocks to the economy, we anticipate that residential property will continue to be a strong investment,’ says Alistair Malins, CEO of Second Estates, which helps people buy and manage holiday homes.
The national picture is quite mixed, but whichever way you look at it the UK is still suffering from a housing crisis. There simply aren’t enough homes available for aspiring homeowners, especially affordable ones well suited to first-time buyers. Most analysts predict price increases across the board until at least 2021.
The private rental sector is going a long way to prop up the market while supply catches up with demand, but even rental growth is starting to reach unsustainable levels in certain areas, making home ownership a pipe dream for many hoping to get their foot on the housing ladder.
Stamp it out
The government has been sharpening its focus on buy-to-let over the past few years, with extra scrutiny which has ushered in tighter regulation and an increasingly unaccommodating tax environment for landlords. This has led to some amateur landlords with just one or two properties deciding to sell up.
Two years ago, in his final Autumn Statement as chancellor, George Osborne announced an additional 3 per cent stamp duty levy on second homes, which came into effect in April last year. Osborne explained the levy as an attempt to stem the growth in rental prices.
The tax hike initially caused a few waves in transaction levels, with a huge rush of activity before the new taxes landed in April 2016 followed by a steep fall in transaction levels, particularly at the higher end of the market. Subsequent activity was more muted, but the numbers are creeping up again, and the drop in sterling following the EU referendum is anticipated to attract more overseas investment.
Over two-thirds of buy-to-let mortgage lending is remortgages, so this side of the market has been mostly unaffected. While the levy has deterred some landlords, it has done nothing to address the growing demand for rental properties. This can only be solved by building more homes.
‘Until we get that, both rents and house prices will continue to rise, and it’s consumers that will ultimately lose out,’ says John Goodall, CEO and co-founder of specialist buy-to-let lender Landbay. ‘For professional landlords, the tax changes have been an unwelcome burden, but there has been little sign that it’s anything other than business as usual for the vast majority.’
A buy-to-let clampdown was looked at as a way of professionalising the sector and solving the housing crisis, but it doesn’t appear to have remedied the lack of supply across both sales and lettings, certainly in the mass market.
‘There’s no doubt that professionalisation is a good thing and will further improve the sustainability of the private rental sector,’ says Goodall. ‘But we shouldn’t see it as a panacea for the housing crisis. We need more houses built across all tenures.
‘From an investment point of view, the property market is a robust asset class that continues to outperform most others. The UK may have seen its fair share of political upheaval over the past few months, but Britain will always need homes, and people that can’t buy, or don’t want to, will always rely on the rental sector.’
The current state of the UK property market is one of mixed signals. Headline data in Nationwide and ONS house price indices shows a market that continues to be on the rise, but sellers are having to drop their asking prices, estate agents have high numbers of properties on their books and the number of transactions seems to be in slight decline.
While these datapoints seem to be contradictory, regional rebalancing appears to offer an explanation. Prime central London had an amazing bull run after the shock waves of the financial crisis dissipated but sellers, as they often do, continued to price in rises as the London market was cooling.
This led to sellers putting properties on the market at unrealistic prices. The properties didn’t sell and the estate agents’ books grew. On the other hand, as the prime London market looked frothy, buyers sought properties in the less salubrious parts of London and the suburbs, pushing up prices.
‘There are three-bed apartments on sale in Hackney for over £3 million, so now buyers will search for value in areas such as Peckham,’ says James Allen, head of alternative investments at investment management firm Walker Crips. ‘This is in microcosm what has happened across the nation.’
There are investment hotspots for residential property around Birmingham, Bristol and Manchester – underlined by the chronic undersupply of new builds and housing stock – but also areas within each of those cities where it’s hard to find value. The UK property market will go through a period of rebalancing.
‘Running parallel with this is an ever-increasing demographic pressure on the residential market supply,’ says Goodall. ‘People living longer and an increase in the number of single occupancy households, as well as the increasing divorce rate, are all playing a key role in driving demand.’
House prices trended slightly upwards in June and July after the typical unease approaching the general election, so the market is showing resilience. The shortage of new housing stock continues to support this rise.
The property market has become increasingly polarised, with developers reporting strong sales and returns despite more than half of properties advertised by estate agents failing to sell.
Most analysts are predicting more muted price increases across the UK, from 6 per cent (Barclays) to 13 per cent (Savills) by 2021, although there is a large variance depending on location. The Centre for Economics and Business Research is more bullish at around 25 per cent over the next four years.
‘House price growth over the past three years has resulted in many would-be buyers being simply unable to afford the deposit on a home, while second-time buyers struggle to fund the gap between their starter and next-time home,’ says Luke Somerset, business development director of CMME, a specialist mortgage broker for contractors, freelancers and independent professionals.
‘For landlords, property is less of a cash cow. Rents may have increased in recent years, but so too have property prices, taxes and delinquency rates, decreasing yields and resulting in many looking to alternative investments.
‘However, there are few that offer investors the ability to touch their investment – if nothing else, an investment in property feels “real” and is a far more exciting topic for discussion over the dinner table with friends.’
What do EU know?
The Brexit vote appears to have had limited impact on the housing market so far, though due to its timing only two months after the introduction of the new stamp duty levy, it’s difficult to assess. In the weeks after the referendum, transactions reduced by about 60 per cent amid the uncertainty at the time.
Within two quarters, however, transactions were back on the rise, house price indices were higher and the initial impacts were soon forgotten. If anything, it will be the immigration deal Britain strikes with the EU that sways the market.
‘The construction industry in the UK is highly reliant on skilled labour from the EU,’ says Allen. ‘Any attempts to increase the number of new builds, thus easing supply pressures on prices, will be hampered if free movement of people does not form part of the Brexit deal. For this reason, Brexit’s impact on house prices may well be neutral in the medium term.’
A reduction in net migration will also have an impact on demand, while a loss of EU passporting rights could impact the strength of London as a global financial centre. However, it’s unlikely that any changes will be dramatic in the short term, and the filter down to house prices is likely to be gradual.
It should be noted that a number of new home sales have been supported by the government’s Help to Buy scheme, as some purchasers simply may not have had the option to buy without this facility. However, in August it was reported that the Department for Communities and Local Government has tasked a team from the London School of Economics with evaluating the scheme as part of a regular review process.
‘The outcome of this may have a bearing on the duration of the scheme so this might well be a milestone,’ says Richard Bate, partner at law firm Gowling WLG. ‘However, the government recognises that the housebuilding industry is part of the beating heart of our economy and is most unlikely to withdraw important support sustaining its health.’
A matter of interest
The base interest rate has remained at a record low 0.25 per cent since August 2016, when the Bank of England initiated the first cut in seven years to help stimulate the economy amid the slowdown in UK markets after the Brexit vote. This has resulted in some mortgage rates being below 1 per cent.
Despite signs that the Bank’s Monetary Policy Committee was moving towards a rise in the base rate, including a close vote in June, the six-two vote in favour of keeping rates at 0.25 per cent at the beginning of August signalled that an increase will come later than some expected.
The rationale for maintaining rates was heavily predicated on the assumption that the recent increase in headline inflation is due to the depreciation effects on sterling as a consequence of the vote to leave the EU. The committee is unanimous that when they do raise rates, this must be done gradually.
‘A gradual increase will allow households to prepare for the inevitable rise in the cost of servicing any mortgage that is linked to base and so reduce any impact the rate rise will have on the housing market,’ says Allen. ‘I would expect to see rates rise in Q1 2018 in order to keep a lid on inflation – not linked to depreciation of sterling – and to provide some monetary policy firepower in the event that Brexit negotiations start to get bumpy.’
Handle with care
Malins says he also doesn’t expect a rate change until 2018 at the earliest. Inflation is expected to remain between 2 and 3 per cent over the next five years, and Bank of England governor Mark Carney has said that the UK’s economy is too fragile to sustain a rate change at present.
‘Should inflation increase beyond the 3 per cent level for a sustained period of time, Carney might suffer some opposition, but it’s likely that the low interest rate environment will continue for some time,’ Malins says.
Bate adds, ‘The weakening of Conservative power may adversely impact growth, but given that this rules out a short-term hike in interest rates, it also helps boost housing demand by contributing to the ability and willingness to purchase property, at least while employment stays robust. However, supply needs to rise to meet demand, and more work is required to improve the planning system in the UK to allow housebuilders to gear up their activity levels accordingly.’