Useful U.K. property market analysis has to take into account a variety of factors common to markets everywhere with one exception: Brexit. Inevitably the ‘B’ word as it has come to be known is impacting confidence levels, creating uncertainty as to the longer term outlook for the country’s economy.
If you are a first time property buyer, looking to live in your property for a number of years, or renting out, it’s a fairly safe bet that the longer term outlook will continue upward price trends. If, however, you are looking for fast property turnaround because you want a foot on the residential property investment ladder, then the following information is worth taking into account if you are still undecided as property for a suitable investment vehicle.
Overall price trends are certainly one consideration when assessing property investment as a viable vehicle for your available investment capital. The experts seem to agree that despite market vacillations and political vicissitudes, U.K. residential property has remained a consistent source of profit for investors, particularly given low interest rates, making the cost of borrowing so cheap.
The recent report by Deutsche Bank offers analysis going back over a century and with the exception of the period when the country was at war in 1939, house prices have risen around 3 per cent a year on average, when adjusted for inflation; this is, say the research team a total of 834 per cent increase in the eighty years since.
The most popular benchmark for house prices and the health of the housing market, however, is the annual report by Nationwide Building Society. This indicator is used by investment analysts at pension funds and banks, so this additional data source in graph form below is encouraging.
GRAPH 1. Source: https://www.allagents.co.uk/house-prices-adjusted/
This depiction of the movement of house prices since 1975 is based on the Nationwide‘s data, also adjusted for inflation, so provides a useful context for detailed decision making when buying and selling property in the U.K. While volatility has characterised the market since professionals still take account of the financial crash and more recently property prices have fallen, when adjusted for inflation, Nationwide did report a real rise in prices quarter-on-quarter, by 0.48% during the latest quarter.
According to the Financial Times, a favourite of the investment minded news reader, you need to “have a complete grasp of how population trends, interest rates and political priorities”. Of these three factors in calculating investment risk and profitability, interest rates tends to be relied on most as a bell-weather for gauging timing for buying and selling properties.
Cost of Credit Making Buying Property Cheap
However, MoneyWeek report that there is another factor even more important than interest rates, namely the availability of credit. This means that the steady property price growth seen over 40 years in Graph 1 does not mean any buyer can assume that price growth will necessarily continue indefinitely.
It is important to take account of the financial calculations involved in property investment.
House prices are high because the cost of borrowing is low. MoneyWeek provide a real world example of borrowing costs, as follows:
“At interest rates of 10%, a £900 monthly payment will pay for a 25-year repayment mortgage of £100,000. At interest rates of 2%, £900 a month will buy you a 25-year repayment mortgage of just over £210,000.”
Thus as interest rates fall, house prices can rise when conditions ease on accessing credit. The amount you can borrow also goes up for a house, limiting the real cost of buying. “…Physical supply and demand does have an effect …but it’s marginal relative to the effect of the supply of credit.”
The Financial Times recently reported that: “ In the U.K., the actual monthly cost of buying a home fell dramatically after the financial crisis and has been more or less flat for several years. Even as the price of houses has risen, the fall in interest rates has kept the mortgage cost of buying much the same.”
If wages are also rising, then this helps affordability for new home buyers and renters alike, especially if interest rates remain stable. This is good news for residential property investors who are looking to buy or to rent. Certainly at current low interest rates, borrowing costs are conducive to anyone turning to bricks and mortar as tangible assets that have a strong history of paying off. Regardless of the outcome of Brexit, the U.K. economy remains strong, making it a continued attractive property investment market, especially given a chronic shortage of available housing, which says the Royal Institution of Chartered Surveyors (RICS) prevent any significant hold on prices.
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