There’s no avoiding the fact that borrowing capital will soon become more difficult, but this is far from a bad thing for investors with a vested interest in a strong and stable market.
Bank of England Interest Rates
A look at the past two decades of activity on the UK property market clearly shows that house prices have, for the most part, risen consistently regardless of the Bank of England’s official base rate.
Though the Bank of England is expected to raise the base rate next year, the Bank’s committee is increasingly divided on the exact timing of an adjustment. Given the importance of the housing sector to the UK economy, the timing will be crucial for maintaining national economic sustainability and will therefore be very carefully considered by the committee with the goal of sustaining positive growth in the national property market.
Governor Mark Carney has stated that he does not expect the base rate to return to the pre-crash average of 5%, and predicts that it will instead stabilise at a relatively low level of around 3.5%. This would be an historically low level – the rate was 5% or more for 30 years between 1971 and 2001.
Consumer Mortgage Rates
There is not expected to be a direct correlation between any forthcoming base rate rises and the lending rates offered to investors.
A look at standard consumer rates versus the base rate over the past decade shows that lender rates were typically far closer to the base rate pre-GFC.
Investors can expect a return to the former state of affairs as the Bank of England raises its base rate and the consumer mortgage market becomes more competitive, forcing lenders to reduce their margins to remain viable. So a 4% rise in the base rate would not necessarily equate to a 4% rise in consumer mortgage rates.
New Lending Restrictions
The Mortgage Market Review (MMR) came into effect on 26 April 2014. The reforms it introduced are a reaction to the failure of the previous regulatory framework in constraining the risky lending and borrowing that preceded the recession.
Under this new framework, affordability calculators will assess the ability of prospective borrowers to repay loans, even if interest rates change. This will help to ensure lenders avoid taking on excessive levels of risk and contribute to greater long-term market stability.
The Financial Services Authority’s own guidance on the MMR describes it as intended to “deliver a mortgage market that works better for consumers and is sustainable for all participants.”
The future remains very positive for the London property market with strong key growth drivers and the confidence of both domestic homebuyers and investors around the world.
Property markets across the UK capital remain strongly affected by a long-term supply-demand imbalance that investors can be confident will continue to drive price growth.
While buyer demand is rising as the national economy continues its recovery, the most pressing factor driving this imbalance is the huge housing shortfall across Southern England. This is now estimated at some 160,000 houses, 72,000 of which are in London.
This situation is most extreme at the lower end of the price-per-square-foot scale, as much of the new demand entering the market is from the lower-income demographic that makes up a large proportion of total UK house buyers. This lower-level demand is being further fuelled by the government’s Help to Buy scheme, designed to help lower-income buyers enter the housing market.
According to the Halifax House Price Index – which measures average house prices against national average earnings for full-time male employees – the UK house prices-to-earnings ratio currently stands at 5.02. This is the highest level seen since before the financial crisis.
This rise in the ratio is a result of wage rises not keeping up with house-price growth, which means affordability is becoming more of an issue for buyers at the lower end of the market. This situation was a driver for the introduction and extension of the Help to Buy Scheme, which Chancellor George Osborne has now extended to 2020, ensuring the long-term demand-driving effects of the scheme, which go some way to negate the effects of this rising house price-to-earnings disparity.
Investors should also note that a look at the tracking of the Index over the past decade shows that the property market’s strongest period of growth came at a time when the ratio was significantly higher than it is now, demonstrating the resilience of buyers’ appetites.
Though tighter lending regulations will make it more difficult for some to borrow if the ratio continues to rise, investors can be confident that the new lending restrictions will help to stabilize price growth and therefore increase the sustainability of the housing market.
Prime Central London - Market Stability
The impressive resurgence of the PCL property market since the low of the recession has now begun to cool. This is a market entering an expected period of stabilisation and normalisation that signals the onset of a more sustainable period of long-term growth. Prices continue to steadily rise, with an average increase of 8.1% seen over the past year, while Savills expect prices to increase by 23.1% by 2018.
The well-recognised stability of the PCL property market has placed it alongside only equities as the favourite investment sector for investors concerned with wealth preservation. In a recent survey of ultra-high-net-worth individuals by Fleming Family and Partners, 55% said real estate – and prime property in London in particular – was the best alternative asset class, followed by agriculture and hedge funds.
The vast majority of Middle Eastern investors are long-term players looking for wealth preservation and strong, high-income-producing assets, rather than opportunistic investors playing the cycle for short-term gains. Such strategies favour prime developments in core markets such as London.
Prime Central London - Lettings and Yields
There’s also a positive outlook for the PCL lettings market, which saw growth of 2.9% in the first half of 2014 compared to a fall of 1.9% across 2013.
Growth seen in recent years has resulted in 25% of all PCL homes entering the rental sector, and if this trend continues at a similar rate by 2021 that figure should reach 34.5%, which would equate to an additional 492,630 rented households on the PCL market compared to today.
Even if the percentage of PCL homes being rented remains static over this time, the PCL lettings market will still see strong growth as projected population increases drive demand for a further 131,250 households on the rental market.
This increasing demand for PCL rental property will have a positive effect on rental rates, and with sale-price growth in the area stabilising, investors can look forward to good increases in PCL yields that have begun to stagnate.
The PCL renter demographic has also diversified in the past few years, with the number of residents working in the finance and insurance sectors having fallen from 55% in 2011 to 47% in 2014. This diversification will result in a more stable rental market that will be less susceptible to industry-specific shocks.
As 2015 will be an election year in the UK, there is an amount of uncertainty over the policy direction that will be taken following the voting in May. In the months until then, the various parties will discuss their stances on the property market, and investors should be aware of how each party’s policy plans could affect their investment prospects.
With the Conservatives leading the current Cameron ministry coalition government, implementation of the party’s election platform would largely see a retention of the current status quo.
They’re committed to fast-track planning courts to help get schemes up and running in response to the current housing shortfall, and will not impose a high-value property charge – the much discussed “Mansion Tax” – or further taxation on foreign buyers of UK property. They also plan to ensure that UK developers agree to launch new schemes overseas and domestically at the same time.
Ed Miliband’s Labour party have pledged to implement a number of property-related reforms should they retake the parliamentary majority.
They intend to approve construction of some 200,000 new homes by 2020 while also considering a two-year holiday on stamp-duty for first-time buyers. Labour are also looking to ban letting agent fees and place limits on rent increases, as well as implementing the much discussed “Mansion Tax”, an annual levy of around GBP12,000 on all homes valued over GBP2 million.
In addition, there has also been talk of Labour banning UK developers from marketing new schemes overseas before they have been marketed domestically.
The Liberal Democrat platform calls for giving UK tenants more power should they again find themselves among the sitting government.
They support the introduction of a corporate stamp duty levied at 15%, but also want additional measures to help housing affordability. They also plan to introduce a form of “Mansion Tax”, but implemented through the introduction of new council tax bands rather than simply being levied on all properties valued over GBP2 million. This is a measure supported by the UK property industry.