Another investment news headline that should be ignored
Investment news headlines are usually written to shock and sensationalise. So, when I read that “Demand for homes dips on election jitters” in City AM the week before the election, I guessed that the headline would be somewhat misleading. I was right.
Here I look at the numbers behind the headline, and answer the question: what next for property investment in the UK?
Demand – the driver of property values
The property investment market is like any other at its most basic level – prices are determined by inequalities between supply and demand. In the UK, this inequality is pronounced.
The 2015 Parliamentary report into housing noted that the demand for additional housing in England lies somewhere between 232,000 and 300,000 new homes every year. It also noted that supply has fallen short of demand every year since 2008 and that the gap between supply and demand is growing.
Even if the government’s target of 200,000 new homes built every year through to 2020 is met, the shortfall is still going to be severe. Unless demand drops. And this is what the investment news headline in City AM seemed to say is happening.
But, as ever, concentrating on an investment news headline can distort the real situation. If you don’t analyse the news yourself, your view of the market could lead to missing some great property investment opportunities.
Has demand for homes fallen? And if so, why?
The fall in demand for homes was noted by the National Association of Estate Agents. It found that there were only 381 house hunters per estate agency branch in April. It compares to 397 in March. That’s a drop of 4%.
However, you mustn’t stop there when analysing the property investment news. Because the supply of new homes for sale also fell – from an average of 39 per branch in March to an average of 36 per branch in April. That’s a fall of almost 8%.
It means that in March there were 10 buyers per every property listed. In April, there were almost 11 buyers per every property listed. Comparatively, even though there are fewer buyers registered, the property market is even tighter than it was!
Property sales have fallen, but sellers are negotiating better prices
The number of sales has fallen, from ten per branch in March to eight in April. Despite this fall, sellers have the upper hand in negotiations. In a weak market, buyers usually have the upper hand.
The number of sales agreed above the asking price rose from 5% in March to 7% in April. The number of sales below asking price showed a 3% fall, while the number of sales agreed at the asking price rose to 21%.
In a declining market, I’d expect fewer sellers to be able to negotiate a higher price from their asking price, not more. And yet, property prices are falling according to the latest Halifax report, which showed the first quarterly decline in UK property prices since 2012. So what is going on in the UK’s property market?
Is the property market taking a breather?
It appears to me that the UK property market is taking a breather. There’s a lot of uncertainty in the market – Brexit hasn’t helped, and neither has the general election. However, demand still outweighs supply. That is unlikely to change.
Both buyers and sellers are cautious. The increase in the ratio of properties sold at or above asking price indicates to me that buyers are prepared to pay for quality. Fewer properties on the market mean fewer quality properties are available. Thus, buyers are waiting. It leads to a fall in the number of sales.
The property market is taking a breather, and I think this is healthy. We’ve had several years of stellar growth in UK investment property values. A period of price stagnation or gentle falls should give savvy property investors the chance to negotiate value prices in long-term property investment opportunities.
What is the outlook for property in the UK?
There is a backlog of unsatisfied demand for new homes in the UK. Moving forward, demand is likely to continue to outstrip supply. All investment markets have blips. These can be caused by all manner of outside influences.
At this moment, the politics is exerting its influence on the UK property market. Over the coming months, this influence is likely to wane. Much may depend on the Brexit negotiations, but eventually, the market here will return to normality. In ten years’ time, the savvy investor buying in the best places to invest in property UK in the coming weeks and months will probably look back as this being a period when they added some real value to their property portfolios.
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Brett Alegre-Wood
