UK property – a good investment?
For those considering whether now is the moment to buy, these are disorienting times. There are as many different markets in one city as there are across the country.
With price growth slowing in former hotspots, transaction levels stuttering and an uncertain period for Britain’s economy in prospect, the housing market has been drawing in its horns. Buy-to-let investors are hemmed in by new taxes and regulations, while owner-occupiers are reconsidering high-risk property moves as interest rates start to rise and mortgage affordability rules remain tight.
This week, Bank of England governor Mark Carney delivered a stunning warning that house prices could be 35 per cent lower than would otherwise be the case three years after a disruptive “no-deal Brexit”.
Some, however, believe today’s uncertain market offers precisely the conditions in which canny purchasers can find opportunities to strike a property bargain. Many experts tackle the issues and stave to assess the outlook for anyone thinking of pushing the boat out on a home purchase.
A journey of price discovery
A housing cycle is under way across the UK, but depending on where you are in the UK, it could either be coming to an end or it is just getting going. While growth is powering ahead in cities such as Manchester and Liverpool, it is flagging or going into reverse in places like Aberdeen and parts of London, according to the latest prognostications.
There are other parts of the UK that are still to see the ripple effects of formerly stratospheric growth in London and the Southeast — a trend that stalled roughly three years ago. Five cities are 50 per cent higher [in price terms] than they were 10 years ago, with Oxford, Cambridge and Bristol among them. But there are four cities such as Glasgow and Newcastle that are still at 2008 levels or even lower.
This decidedly mixed picture is reflected by lacklustre levels of activity in the housing market. The number of housing transactions has been stuck at the same level for four years — around 1.2m per year — but in London, where the market slowdown has been particularly marked in central or “prime” areas, turnover is down by 20 per cent over four years. Sellers are coming to terms with the fact that there are fewer buyers on the ground, and today’s house hunters are making higher demands of vendors.
But some of those sellers are not yet willing to acknowledge that a material change in sentiment has taken place. One indicator of this is the gap between asking and selling prices, which stands at 10 per cent in central London. In Manchester and Birmingham it has narrowed to about 2.5 per cent.
The human factor
Among asset classes, housing often carries a strong emotional connection for its owner-occupiers — a connection that few would ascribe to the equity funds sitting in their Isa. But we must not forget the limitations of statistics in informing a decision about how to put a roof over one’s head — something that is essentially “a human endeavour”.
To ask the question whether property remains a good investment may be uncontroversial, but the question certainly marks a long-term and lamentable shift in public attitudes over the function of housing and the development of a national obsession with house prices.
On the logic of pressing ahead with a purchase today, pricing may be hard to pinpoint in a sluggish market with low turnover, but the fact that everyone in an area is in the same position means losses on one side of a transaction can easily become gains on the other.
Most people sell because they want to buy something bigger. Say you’ve got a £1m house that’s now worth £850,000. You’re trying to buy your dream house, which might have cost you £3m three years ago, and you can probably buy it now for £2.25m. Who’s winning here?
Uncertainty is bringing with it opportunity because people don’t know how their sale is going to go, or how far their budget will stretch. As a result, people are jumping the wrong way. Sometimes people are selling for less than they might have been able to get and in other cases other people are sitting tight.
The difficulty of finding the right price in this climate of uncertainty, however, has brought interesting developments in the way people are marketing their homes. Terrified of putting their house on the market at the wrong level and either sparking no interest or leaving money on the table with a price pitched too low, vendors are increasingly turning to “ off-market sales”.
These allow them to put the word out among selected potential buyers, without publicly advertising the sale. There has been “real growth” in the number of off-market websites.
Buy-to-let pressures
For owner-occupiers, investing in property can mean stretching oneself on a mortgage in the belief that a house is undervalued, or will rise in value following a revamp. But market purists might consider mainstream “property investment” to refer to the buy-to-let sector.
There, the experts agree, the outlook is not rosy. Landlord investors have been in high dudgeon after a series of tax and regulatory changes that have hit profits and raised the costs of investment. Extra stamp duty in the form of a three percentage point surcharge on buy-to-let purchases introduced two years ago is one drag on the sector. Arguably, the more damaging move for highly leveraged landlords is the loss of higher rate tax relief on their mortgage interest, which is being eradicated in stages, disappearing for good in 2020. Mortgage affordability has also been curtailed by stringent “stress tests” demanded by regulators.
“All the benefits to owning a buy-to-let property are being taken away,”
The hit to higher-rate taxpayers has come together with the prospect of higher interest rates on buy-to-let mortgages after base rate rises, causing landlord owners to question their underlying rationale for investment and squeezing out those who pin their hopes on a short-term return via capital growth.
What buy-to-let still offers is a pension-style income stream that delivers a monthly cash flow from a property. This can allow investors who are no longer working to benefit from earnings growth in the form of higher rents.
Yields may be low, but if you invest in the right markets this long-term link between rental and earnings growth is to me the underlying attraction of investing. Learning to love the cash flow and taking what the housing market gives you on house price inflation is the way to approach investment.
As London’s rental yields have paled against those achievable in the expanding cities of the north, investors based in the south are fishing further from their home territories in search of better returns. But the arms-length nature of such deals raises questions about the need for fine-grained research into proposed areas for investment, with good and bad deals aplenty even on the same street.
Does the loss of easy returns from price growth mean we will see a return of the classic “doer-upper” investor? The option of improving the value of a home through refurbishment or development has not gone away. You can make money with property by repurposing something that isn’t attractive today, turning it through 90 degrees and creating an increased value in the market.
The Brexit discount
One of the thorniest questions for those mulling a purchase or sale in the next few months is the extent to which the as yet unknown mechanics of Britain’s departure from the EU will affect any move they make in the market. Will a good Brexit deal cause prices to surge, or will they plummet should Britain crash out without agreements in place?
The “wait and see” approach already adopted by those not facing a forced sale or purchase will be followed more widely towards the end of this year, said Mr Pryor, as the political situation comes to a head before March 2019. In his view, this creeping reticence will tell on prices, leading to a drop of roughly 5 per cent in the second quarter of 2019.
“If you’re going out to buy what for most people will be their most expensive single asset, how brave have you got to be to commit to that purchase rather than do what I think most people will do and say — let’s just wait until June?”
One effect that we can pinpoint is the fall in the share of the capital’s homes being bought by overseas purchasers — a trend that is likely to accelerate until the uncertainty over Britain’s future status begins to dissipate.
We’re seeing less activity from international buyers. UK domestic buyers are now 80 per cent of London transactions. If you’re staying in the UK you have to make decisions, you have to change home whether you’ve had children or changed jobs.
If we have something more severe — a hard Brexit — there would be rising mortgage interest rates and stressed affordability. Prices might come down more, but if you’re a first-time buyer trying to get into the market, the lenders are probably just going to shut up shop.
A property price crash would be driven by rising unemployment, depressed economic growth, higher inflation and higher interest rates.
You can spend an awful lot of time getting very confused by this stuff. It doesn’t matter what you think is going to happen in the next year or so. People love Britain because it’s safe and economically stable. It’s not going to lose its lustre. So long as you take a long-term view, if you see something you like and it makes sense to you, buy it.
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