“Housing market outlook worst for 20 years, say surveyors” BBC News, 17 January 2019
“Negative housing demand for eights successive month says RICS” Property Reporter, 11 April 2019
“Brexit a major drag on UK housing market, says surveyors” The Independent, 11 April 2019
“House price forecasts heavily downgraded as Brexit freezes market ” The Telegraph, 23 April 2019
You could be excused if you find yourself downbeat about investing in the British housing market. Of course, headline property value changes are quick wins for the press, and provide exposure for the sources; whether you are an investor, a homeowner or looking to get on the housing ladder, house prices are important in understanding your financial capacity.
The perceived sentiment in the market is further compounded by the political and economic backdrop. Brexit, the global economic ‘slowdown’, trade deals between the USA and China, the future makeup of the British government all can have an impact, to various extents.
However, a closer look at the facts provides a different picture. Amidst press speculation, opinions of those with a vested interest and Brexit mania, there is clarity that the UK housing market is trotting along just fine.
As you read on please remember, your capital is at risk when you invest and past performance is not a reliable indicator of future performance.
Why should we question the headlines?
Some commentators on the UK property market have a habit of writing sensational headlines to sell papers or clicks. In the world of media, bad news is good news, and good news is…dull news. We as investors need to read between the lines.
Let’s take a look at the source behind the above headlines. Perhaps the most trusted body in the property industry, the Royal Institution of Chartered Surveyors (RICS), provides a monthly sentiment survey (the UK Residential Market Survey), used by the Government and the Bank of England among others, and journalists. The survey takes into account the views of over 300 Chartered Surveyors in the residential sales and lettings markets.
Understanding the methodology is important. The survey is both qualitative and quantitative, taking into account statistics (e.g. average price change over a three month period) and the estate agents’ opinions (e.g. ‘how do you expect sales to change over the next three months?’). Worth considering is that it does not include responses from online estate agents, such as Purple Bricks, estimated to represent about 7% of the market.
At Property Partner we respect the work done in this survey; it is a valuable gauge on sentiment within the industry. But it is only a piece of the puzzle – to understand the full picture of the market, it is important to also consider other indicators, such as house price performance, the number of transactions and mortgage approvals, as well as looking at long term investment data sets (more about these later on).
Has the UK property market frozen?
Behind the refraction of the headlines, long term housing market trends are performing…well, just fine, actually. In fact one could argue the stability of the market is so mundane that it doesn’t deserve much headline news coverage, but the savvy property investor would recognise stability as the best news of all.
The statistics for house prices show a good level of stability in the market. Nationwide suggests house price growth has been 18.2% over five years, 41.2% over 10 years and 309.0% over 25 years. Land Registry data, which uses a different methodology, is roughly the same – in fact, their measurement of average property price is slightly more optimistic, registering 26.4% growth over five years, 45.6% over 10 years and 314.2% over 25 years.
Whilst headline rates about London and the South East are likely correct in that they are flat or in some cases declining, we have also seen significant price growth in these areas over the last decade, perhaps indicating a current price correction as well as a response to stamp duty and buy to let tax changes.
Data from LSL Property Services, would suggest that the national picture is being distorted by London and the South East, with solid house price growth over the past year in areas such as the West Midlands (1.9% growth), North West (1.5%) and Yorkshire & Humberside (1.2%) offset by falls in London (down 1.1%) and the South East (down 1.9%) – and of course, this is just based on one year’s performance. Indeed, pockets of London are demonstrating strong annual growth, such as Southwark (24.5% growth), Richmond upon Thames (7.1%) and Ealing (6.5%). It’s worth noting that the number of transactions in January and February tend to always be lower than other times of year, so outliers may have more influence on the rolling 12 month averages reported. The point is that there is growth out there and like any complex market, there will be winners and losers.
Much of the property focus in the press is on Prime Central London (PCL) properties. Compared to the rest of the British property market, PCL only makes up a fraction of the housing market and is of little use as a bellwether for the national market. The number of transactions within PCL are insignificant, only 66 per week out of ~23,000 per week nationwide.
According to HMRC’s latest UK Property Transactions Statistics, seasonally adjusted property transactions above £40,000 are remarkably stable. Over both a five and 10 year period, the stability of the housing market remains impressive, as the below graph indicates.
The Financial Conduct Authority (FCA) provides further evidence for this trend, with total value of all mortgages in Q4 2018 in the UK increasing at a moderate rate over one, five and 10 year periods. In fact, the total value of all mortgages in the UK increased by 3.1% over one year, 16.4% over five years and 20.1% over 10 years.
Despite the greater restrictions on lending by banks in the wake of the financial crisis, evidence suggests buyers are happy to continue buying houses and banks remain willing to lend. Of course, this data set doesn’t include cash purchases.
Supply & Demand
Many would argue that the housing market remains dominated by the simple economic model of supply and demand. England is still failing to build enough homes to meet demand in several regions across the country, with a Parliament briefing paper published recently estimating the housing supply needed to meet demand at 240,000 to 340,000 per year. As unhelpful such a wide range is, only 222,000 new homes were completed in 2018, well below what is required and that is not an outlier.
Despite expectations that Brexit would impact migration flow, net migration remains positive at over 280,000 in 2018, with the UK population forecast to grow by 5.5% between 2016 and 2026, and England 5.9%. Other demographic fundamentals, such as record low unemployment, wages both steadily growing and consistently outstripping inflation and an ageing population all point towards a market where more housing will be needed.
Rents continue to grow broadly in line with inflation, rising by 1.2% in the year to March 2019 according to the ONS, with inflation currently 1.8% over the same period. The below graph shows all data since January 2011 (noting inflation measures the UK, with rents measuring London, England and Great Britain), using ONS data. The chart demonstrates that rents have been more consistent than inflation over the past seven years, and for the majority of 2015 and 2016 consistently outperformed inflation.
With cities such as Manchester, Liverpool and Leeds attracting increasing levels of Build to Rent development, and Goldman Sachs having recently entered the market by providing a £118 million debt facility to a development in Birmingham, one could conclude that the market has significant potential for growth outside of London. We will be looking at rental income in more detail in future articles.
A stable market
Investment is not meant to be like The Wolf of Wall Street; a sustainable rate of growth through rental returns and capital value rises over the long term are hallmarks of successful property investment. The UK remains home to world leading companies, leading global academic institutions, a world class healthcare system, mature economy, and a respected political system (albeit one that is going through a bit of a tough time right now!).
Property investment needn’t be complicated. Behind every alarming statistic and headline is the ongoing story of a stable real estate market which provides solid returns. With technology changing the way investors can approach any asset class, an industry, which has often lagged behind in its accessibility and propensity for transformation is being reborn – and with clear, unbiased information real estate can remain at the heart of a solid investment portfolio.
To finish off, we thought we’d write some alternative, albeit less attention grabbing headlines – and all are wholly accurate according to the March RICS survey:
“Estate agents are getting MORE efficient and selling MORE of the properties on their books”
“Estate agents in London and South see INCREASE in number of listed properties per branch”
“Estate agents are selling MORE properties in London than a year ago”
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