The effect of market fundamentals on property investment
Off-Plan property investment opportunities offer perhaps the best potential returns for the long-term property investor. While inexperienced property investors are terrified by buying at the wrong time in the property trend cycle, experienced off-plan investors don’t care about recessions.
In my last investment blog, I looked at how property fundamentals determine the best places to invest in property UK. Here, you’ll learn how market fundamentals dictate the overall property trend cycle, and what this means for investment opportunities.
The state of the economy directly impacts property values and works in a top-down manner. What I mean by this is:
- the global economy affects the national economy affects the local economy.
When the economy is strong, demand for housing and from tenants grows. When it’s weak, rental prices and property values may fall. Global, national, and local populations react to economic health – people move to where the money is.
Inflation and interest rates
The UK has a target inflation rate of 2%, a rate that has been undershot for a couple of years. If inflation is too high, interest rates may be increased to reduce demand. When inflation is too low, interest rates may be cut to increase demand and stimulate economic activity.
Inflation is a double-edged sword for the property investor. On the one side of the blade, higher inflation will probably mean higher costs and increased mortgage interest rates. However, the higher economic activity that has caused inflation will probably say there is more demand for housing and rental properties. It has already led to higher property values, and it’s also easier to raise rents.
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On the other side, lower inflation may reduce interest rates, though while that’s good for buy-to-let costs, the subdued economic activity that has led to lower inflation will dampen demand for housing. Property values and rental prices may fall, and with lower inflation, it will certainly be harder to raise rents.
If you’ve invested in a good property, in an excellent location, and have planned your finances for all contingencies, you can ignore interest rates in 2017!
When the economy is healthy, people are more able to negotiate better wages. Companies will increase the salaries of key staff to stop them moving elsewhere. With more money in their pockets, people are more willing to pay higher rents as well as seek to buy their homes.
Higher wages also tend to boost investment activity, as people are better placed to invest for their future. Banks and other lenders are more willing to offer credit and loans, and mortgage activity increases. All this puts further upward pressure on property prices.
Demographics and population
Demographics and population also affect the property trend cycle. The economy may cause population changes, but are also shifted by lifestyle change. Factors that influence population change include:
- Changing housing preferences
- Population age
- Economic transformation (e.g. new technologies displacing old industries)
For an example of the latter, consider how the coal mine towns were decimated in the 1980s as coal production closed down, and now how Hull and Humber are positively affected by a vibrant renewable energy sector.
Supply and demand
Finally, supply and demand affect the property trend cycle. Where and when supply increases and/or demand falls, property values and rental prices will decline. When supply is short of demand, property values will increase.
Supply and demand are the one fundamental that truly dictates prices, on global, national, and local levels. In the UK, the housing market is massively understocked. It’s estimated that, despite a target of 200,000 new homes every year during this parliament, the country’s new housing stock is short by around 100,000 homes every year.
This demand is not going to dry up overnight, and it’s clear that supply cannot just be switched on. The conclusion is that property prices in the UK will continue to rise for years to come. To find the best places to invest in property UK you’ll need to find where the demand is strongest – and that is why the property fundamentals are so important, because where they are strongest, so too is the demand.
Can you ignore the economy when investing in property?
It sounds like I’m a little sceptical on how much the economy affects property values, and that’s maybe because I am. Whatever the economy does, people will always need somewhere to live. Sure, the economy will affect sentiment, and that may have short-term impacts on property prices. But don’t forget, your aim is to invest in the best places to buy property. So, it’s the local economy that should be your primary concern, and how strong the property fundamentals are.
I’m not suggesting that you shouldn’t take market fundamentals into account when making your property investment decision, but whether you’re a new or experienced investor, you shouldn’t let them dictate your strategy. Instead, evolve your strategy to take advantage of market dynamics and great property investment opportunities as they come along.
If you don’t have time to do the research to find the best places to invest in property in the UK, contact one of our team today on +44 (0)207 923 6100. Ask about our property investment research and discover why our 108-point due diligence process is so unique and has helped thousands of investors make profitable off-plan property investments.
Live with Passion,
- Learn more about how to evolve your property investment strategy to profit in all economic conditions by downloading our free book “The Property and Economic Trend Cycle”.
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