No need for property investors to panic, despite the scribblings of doom merchants
Investment news last week was mostly filled with gloom. Talk of falling sales and falling house prices. A projection that many first-time buyers would never be able to afford to buy a home of their own. News that retirees are releasing more equity from their homes than ever before. Here we examine this investment news, and see that there may be a silver lining to the dark cloud that some are predicting will evolve into a property market storm.
Hometrack says property investors are losing money in real terms
Latest data released by Hometrack shows that general inflation has outpaced house price inflation for six straight months.
The conclusion is that property investors have lost money in real terms. In July, the Retail Price Index (RPI) increased to 4.1%.
The average asking price for the average UK property rose by 3.3%.
The average asking price figure is skewed downward by the effect of prices in London. Here, Hometrack says that prices have shown zero growth year-on-year. However, property investors in the East of England, West Midlands, East Midlands and the South West have all benefited from house price inflation of more than 4%.
Housing stock hits a new low
The Royal Institute of Chartered Surveyors (RICS) has reported that property sales have fallen in June, and most important new instructions have fallen for the sixteenth month running.
5% more respondents to its latest survey told RICS that they witnessed a decline in sales numbers between May and June. However, despite this indicator falling to the lowest monthly level since the EU Referendum, it still forecasts higher activity over 12 months.
New instructions to sell are falling, with 19% more respondents expecting a fall rather than a rise in property coming to the market.
Many first-time buyers will never save enough to buy a home
The online estate agent, HouseSimple, has worked out how long it will take a range of first-time buyers to save a deposit for their first home. Its report shows that many first-time buyers would have to live more than 100 years to save their deposit – and this is if they can afford to save 10% of their earnings.
HouseSimple bases its calculations on the average price of a first-time buyer property of £198,309, and a mortgage of 4.5 x salary, and national average wage figures from the ONS. For example:
A bar person earning the average of £13,345 would require a deposit of more than £138,000. A 10% of net salary saved, it would take 112 years to save this deposit.
Retirees are releasing more home equity than ever
A report from Key Retirement shows that retired homeowners are cashing in on their property values more than ever before. The data confirms that almost 100 retirees per day are taking out an average of almost £71,000 from their home. In the South East, the average is £82,000. In London, it is £114,000. More than £1.25 billion of property wealth was released in this way in the first six months of 2017.
What you can learn from this week’s property news
Most property investors are beating inflation
It’s never good news when returns grow at a slower pace than inflation. However, the way in which many reports have been written leads the reader to assume that real-term losses have been mounting substantially for months and that it is time to press the panic button. It isn’t the case. Investors in most of the country are experiencing capital growth ahead of inflation. Their returns are outpacing the RPI, even before their rental income is added into the equation.
Even when examining the averages on a national basis, the average property investor is down by around 0.8% in real terms over the last 12 months. It comes after a period of around seven years when house price inflation outpaced RPI by some distance – as much as 6% to 8% per year, every year!
Long-term investors have no reason to panic
If you are a long-term investor, there is no need to panic. While the RPI may head higher yet (thanks to the effect of sterling weakness, for example), it is predicted to fall in due course. On the positive side, higher inflation is your opportunity to raise rents. Add together your rental income and house price inflation, and I suspect you may fall in line with most property investors who are still experiencing returns some way above inflation.
Lower supply puts a floor under property price falls
Tempering any property price falls, fewer homes on the market should help to support prices. However, while London is dragging national house price inflation numbers lower, it is clear that investors must dig deeper into the numbers to see a clear picture. High-end luxury property prices are slipping back. Prices in London are weaker than the rest of the UK. But elsewhere, and in different property types, prices are still moving higher. And people want to buy. Lower supply and stable or increasing demand are likely to lead to upward pressure on property prices.
Rental demand will grow faster because of affordability issues
The HouseSimple research has highlighted what many property investors know already – rental demand is growing fast. Property prices in the UK are unaffordable for many. Buy-to-let investors should be buoyed by these numbers – it is confirmation of continuing demand in the rental sector. Meanwhile, the underlying demand for homes will continue to put upward pressure on property prices. It looks like a win/win for long-term property investors.
Parents are opening the reserve account of Bank of Mum and Dad
Retirees are releasing huge amounts of cash from their homes. It may, in part, be to help themselves (clearing debt, for example); but there is increasing evidence that they are releasing equity to help their children get on the property ladder. Instead of waiting to die and never seeing their children put an inheritance to good use, retirees are taking their wealth early and paying deposits on their children’s first homes.
Last week’s news is exceptional evidence of the need to never read the headline and assume it tells the truth. You have to read the entire news report, and then dig a little deeper to get to the truth – which is never as gloomy as the hacks report.
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Live with passion
Brett Alegre-Wood
