When assessing future prospects for residential property investments in the UK, it is best to s...
When assessing future prospects for residential property investments in the UK, it is best to start by analysing the fundamentals. Why is there a shortage of serviceable, habitable housing the UK?
When we consider we all need a roof over our head, you start to see the picture. Also, in simple economics, where demand outstrips supply, prices rise. From an investment perspective the scenario improves because the UK is not tackling the supply issue, with less construction of new residential properties today than in previous decades. Therefore, as an investment asset, residential property has a bright future.
The UK population is growing, both organically and through immigration. In the recent Rowntree Foundation report, Land for Housing: Current and Future Options, the findings highlight 'demand for extra homes in England is now estimated at 210,000 properties a year compared with average output from house builders and social housing providers of 154,000 per year.' They highlight that if this trend continues there will be 'a housing shortfall of 1.1 million houses in 20 years.'
The factors driving demand are:-
1. Increased immigration ' the Government Actuaries department forecasts net inward migration of 135,000 people (43,000 households) per year in the forthcoming year.
2. Population growth ' birth rates in the UK are healthy, but the key issue is longevity and the fact that people are living longer is leading to an expanding population.
3. Increasing self-occupancy ' in the UK there is an increasing trend for younger people to leave the family home at a relatively early age and live in their own property prior to marriage or settling down with a partner.
4. Increased divorce rates ' this links to increasing self-occupancy, where each party seeks to have their own home following the divorce or separation.
5. Older marriage age ' there is a growing trend for couples to cohabit or marry at older ages than in previous generations; research suggests this has moved from an average age of 21 to 28 over the last 30 years, all of which increases and prolongs the self-occupancy situation.
Clearly, unless significant steps are taken to increase the supply through increased construction, ease of planning processes and redevelopment of brown field sites, the supply-demand gap will grow. Even against this fundamental background many commentators have stated prices are overvalued and will crash. While I agree that rises of 25%-30% year on year are unsustainable, a crash is not imminent.
A crash is highly unlikely due to two key factors: first, affordability and second, economic housing value. In recent research conducted by Oxford Economic Forecasting and Cluttons it concluded UK house prices are not overvalued. This is justified by the combination of historically low levels of interest rates, low unemployment combined with strong income growth in recent years. Graph one, Household Disposable Income vs Average Earnings, highlights the growing value of disposable income as opposed to average earnings. Disposable income has grown with the rise of dual income households and takes into account items such as the effect of tax changes and is therefore more relevant than average earnings.
Graph two, Housing Affordability, illustrates the affordability of housing in the UK and Central London. It is re-based to late 1989 and illustrates the house price correction in 1991 which followed affordability moving over 100, for example the cost of purchase was too great. As it demonstrates, house prices are becoming more affordable. Affordability is measured using disposable income, mortgage debt finance and interest rates.
Looking at these factors, bank base rates are likely to remain around 3.75% for the near future with most analysts predicting a figure of 4.25% by the end of 2003. With inflation creeping up to 3% in January a small rise by the Bank of England may be appropriate to keep inflation within its target range. In employment terms, although companies are keeping firm controls over costs during this tight economic period, and some companies are reducing their workforce, any slack is being picked up by other sectors and UK unemployment is still, on the whole, very low.
As for disposable earnings, most people are seeing salary rises in line with inflation. Tax charges, especially the so-called stealth taxes will impact on this but it will not be significant and will be phased in.
I believe we will see a slight move upwards on the affordability line on graph two but not sufficiently to cause any major downturn in housing values. If anything, this is a positive and will avoid overheating in some of the residential hot spots.
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