What does the UK homes shortage really mean for property investors?

Why UK property values will continue to rise

Investment education sometimes complicates the basic nature of price performance. Prices rise when demand is higher than supply, and prices fall when the supply/demand fundamentals reverse. As a property investor, your objectives boil down to either making a capital gain (selling at a price higher than the price you paid for an investment property), receiving income from rent or both. These financial objectives are at the root of why I invest in property: to create the lifestyle I want.

In this article, I’ll examine the supply/demand picture in the UK housing market, what it means for the future of property investment, and explain why savvy investors weren’t concerned by the Global Financial Crisis (GFC) and the hit to investment property prices.

Excess demand for UK homes is not a new phenomenon

The gap between demand for homes and supply of new homes is not new in the UK. A parliamentary report investigating the future of the UK housing market shows that as far back as the late 1970s the property market was stressed. In fact, since around 1984 (and as the chart below shows) in only about one in every three years has the supply of new homes been higher than the demand. Even then, this oversupply was minimal.

UK Homes supply v demand Parliamentary Report.jpg

Demand for new homes in the UK is set to increase

The assessment which is perhaps most interesting for property investors is that supply looks likely to remain reasonably steady, while demand continues to increase. It’s estimated that this demand will stretch as high as 300,000 each year. 2016 was a recent record for housebuilding, with 189,000 additional homes created.

The government has set a target of 200,000 new homes each year during this Parliament. Over the five-year term, that means the accumulated shortage will be as much as 500,000. With this volume of undersupply, there is only one-way residential property prices are going, and that’s up. And let’s not forget that housebuilding can’t simply be switched on: it takes time to release land, get permissions to build, and then develop new homes.

Of course, some of this excess demand is due to immigration and foreign investment. Experts tried to call the end of rising property prices when the electorate voted for Brexit. They told us that immigration would come to a sudden halt and that foreign investment in UK residential property would dry up. The market is coming to the realisation that neither forecast looks likely.

The latest immigration numbers showed that immigration into the UK is at record levels. The government is rapidly moderating its rhetoric about the ability to slash immigration numbers. Net immigration looks likely to remain in the hundreds of thousands rather than the tens of thousands.

Foreign investment into UK property has been bolstered by the fall in the pound. Overnight, London property became between 15% and 20% cheaper in the currency of the foreign investor. Instead of falling, as many experts had predicted, investment into the residential property by foreign investors has increased.

The result? House prices are rising as a continued new homes shortfall is forecasted, and overseas investors remain confident in the UK economy and housing market.

The rental market is heating up, too

A report in October last year concluded that the UK is facing a “critical rental shortage”.  The Royal Institute of Chartered Surveyors (RICS) forecasts that the number of households that want to rent rather than buy will increase by at least 1.8 million by 2025. That will push the number of households that are renting from 5.4 million to around 7.2 million before the end of the next parliament.

Supply and demand – rental prices are not going to fall.

How do you make sure you benefit from the shortages in the UK homes market?

It is no secret that there’s a massive shortage of homes in the UK. The state of our property market has been hitting the headlines for as long as I can remember. I wasn’t concerned about the fall in property values caused by the GFC, because where I’d bought properties because I knew that demand would continue to outstrip supply.

And that’s the real secret to profitable investment in residential property (if there is a secret): go where the demand is. Buy in locations where demand is set to be strong for decades. Research the property fundamentals and make sure that the following are all in place:

  • Shops
  • Schools
  • Transport links
  • Major employers
  • Major investment

Do this, and when the market gets spooked by the big, macroeconomic issues like Brexit, the next GFC, and market downturns, you’ll see opportunity where others see despair.

Of course, there will be times when property prices fall, and rental prices ease slightly. If you invest in areas where the property fundamentals are weak, your investment will be prone to higher falls and lower rental income.

So, do your research and buy in the best places to invest in property UK. It will protect your investment from the sudden big shocks over which you have no control. Your property investment will be more resilient during slow periods, and continued demand will ensure that capital gains and rental income rise at rates above the UK average.


Contact one of our team today on +44 (0)207 923 6100 to discover why investors that use the strategies and methods described in my award-winning book, The 3+1 Plan, see opportunity when others see despair.

In the 3+1 Plan, you’ll learn:

  • how to do your research;
  • how due diligence makes certain that you invest in the right property and in the right location; and
  • how a cash flow strategy will ensure you never overstretch your finances when investing in property.

It’s this investment education that will make sure you always take advantage of the UK homes shortage, and that you’ll benefit from the highest capital gains and rental income throughout the property trend cycle.

Live with passion

Brett Alegre-Wood

Brett Alegre-Wood
January 19, 2017

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