Report predicts strong future for housing market

A man looks at a graph

News earlier this month that London prices had risen by almost a fifth inside of a year caused alarm among the public and the media, and once again provoked debates about whether or not the UK, and London in particular, are in the midst of a housing bubble.

On 24 March, the Office for National Statistics (ONS) announced the fastest annual increases in UK-wide property prices for over three years. However, a new report from property investment company Select Property argues that the growth is not yet outside the boundary of natural market forces.

Housing market predictions for 2014

The report, entitled Predictions for the UK Property Market in 2014, cites the Funding for Lending Scheme, Help to Buy and the five-year nadir in interest rates as being the primary factors in facilitating inexpensive lending and maintaining engagement with the property market, despite the financial conditions that have prevailed since the recession.

Low interest rates have been instrumental, the report argues, in avoiding a crash. In previous recessions, interest rates continued to rise, and the cost of property ownership became unsustainable – resulting in widespread arrears and repossessions and a subsequent dive in prices.

Construction is also far lower than is necessary to sustain the population. Between 2012 and 2013, only 125,000 new properties were built; well under half the numbers seen when construction was at its peak 40 years ago. The only lower point seen in the past three decades was between 2008 and 2010, immediately after the recession hit.

The construction effort required to address the imbalance between demand and supply, the report says, is unlikely to happen in the coming year – and probably won’t happen by 2027, at which point the ONS predicts the UK population will reach 70 million.

As the Bank of England has indicated that interest rates will remain low, and Help to Buy is set to continue until 2020, it is reasonable to anticipate that demand will continue pushing prices up throughout 2014. It should be observed that, since the report was published, the Bank of England has reported an 8.4% decrease in mortgage approvals between January and February – though this could simply be a sign that mortgage lenders are tightening their criteria in advance of the Mortgage Market Review (MMR) coming into force later this month.

Buy-to-let

2013 was a good year for the buy-to-let market, with student property performing particularly well. The potential return on property investment is continually drawing new investors to the sector, and further growth is expected in 2014.

Interestingly, the report does not mention any anticipated effect of the MMR, which commentators believe will bolster the buy to let market as lenders seek to court more unregulated business. If demand for property continues unabated throughout 2014, it seems very likely that buy-to-let business will form a larger proportion of it.

London

The report acknowledges that the London property market is a separate entity to that of the rest of the UK, but also stated that it does not exist ‘in a vacuum’, observing that commuter belt areas will see increased demand and rising prices as more and more people are priced out of the capital.

Conclusion

As to whether these figures represent healthy growth or the warning signs of an asset bubble, the report errs towards the former. The definition of an asset bubble is a sharp and sustained rise in prices that exceeds justification by the market fundamentals of supply and demand – and given that the supply of housing in the UK currently falls very short of the level demanded, it could be argued that the rise in house prices is not, at present, unjustified. Additionally, the report observes, the rise in house prices could simply represent a natural correction following a long period of market dormancy.

This is corroborated in part by figures from Nationwide, which show that the inflation of house prices is slowing. However, it remains the case that prices throughout the UK are out of the realms of affordability for most average earners, and that Central London property is all but restricted to wealthy investors.

The report concludes that the UK property market is in a secure position, and that property will continue to be a promising asset for investment throughout the coming year.

To read the full report from Select Property, click here: www.selectproperty.com/locations/uk-property.

This information should not be interpreted as financial advice. Mortgage and loan rates are subject to change.

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