Is property still the best investment?

Where are London property prices heading now?

In the UK, property investment is seen as the preferred route to wealth by most people. Even those who aren’t investing (home buyers) gauge their wealth by how much their house has increased in value. It’s the largest expenditure the majority of people make, and offers many benefits to investors. These include seven reasons why investing in property beats all other investments:

  1. You’re in control of your investment while others do the work
  2. Rental income is better than stock dividends (and paid monthly)
  3. The history of capital gains is stronger than even stocks in the long term
  4. It’s a tangible asset – something real to leave the kids when you die
  5. The government provides ways to reduce your income tax bill by claiming deductibles
  6. Leverage powers your property investment return – you use other people’s money to make money
  7. With the right investment education, property investment in the UK is easy to understand

However, even given this unique set of benefits of investing in property, when prices have increased by as much as they have in the last few years and then start to cool down, you’ll want to know if property is still the best investment in the today.

In this article I’ll look at how London property prices are currently performing, the reasons why they are moving the way they are, and whether property is still the best investment.

London property prices – perception v. reality

Recent national and local press headlines – particularly post-Brexit – have lead us to believe that London property prices are falling. This simply isn’t the case. In fact, according to actual sold prices as recorded on the UK Land Registry, over the last year there has only been one month in which the average house price in London has decreased.

Despite this real evidence, investor mentality has been swayed by headlines such as London house prices slashed after Brexit vote (Evening Standard July 1st, 2016). I won’t go into the details of the unedifying misinformation contained within that article here (you can read my analysis in my article “Why property investors should never believe all they read in the newspaper”), but, needless to say, we’ve been deluged by calls from concerned property investors because of this type of sensationalist reporting.

How are London house prices really holding up?

The London property market has faced a number of headwinds in the last year or so: We’ve seen changes to the way that mortgage interest tax relief is calculated on property investment; UK stamp duties have been increased on second home purchases, with a 3% surcharge; and, of course, we’ve had the Brexit vote.

(See my analysis of the outlook for the UK property market “How will the UK property market perform in 2016/2017 after the Brexit vote?”)

Looking at the London property market, we can see that prices rose strongly in March of this year and then fell back in April. This can be easily explained, especially when we look at the numbers of transactions.

The additional stamp duty was announced in last year’s Autumn Budget. Everyone knew it was coming in April this year. Consequently, buyers rushed to get deals done in March before they were affected by the stamp duty increase. There was a record number of house transactions concluded in the month (16,322). Sellers pushed up prices as demand soared.

Unsurprisingly, transactions collapsed in April, and prices fell too. It could be argued that the fall of only 0.31% was an extremely robust result.

London_House_Prices_Monthly_Change.jpg

Turn to May through July, and you’ll see that London property prices are rising strongly, but the monthly rise is on a downward trend over the three months to July. Even so, the 12-month rise of 12.3% is a faster pace of growth than throughout the last quarter of 2015. It’s also a faster price growth than the average annual increase experienced between 1973 and 2015, measured by the Nationwide House Price Index at 8.8%.

London House Price Data from the UK Land Registry

Month Sales Index Value Average Price % Change on month % Change over 12 months
2015-09 11,065 109.16 439,729 0.82 8.93
2015-10 11,200 109.34 440,484 0.17 9.49
2015-11 9,806 110.58 445,485 1.14 11.15
2015-12 9,700 111.72 450,053 1.03 11.70
2016-01 8,093 113.56 457,466 1.65 13.56
2016-02 8,171 113.63 457,759 0.06 13.09
2016-03 16,322 115.34 464,647 1.50 14.81
2016-04 4,616 114.98 463,208 -0.31 12.85
2016-05 5,111 117.27 472,429 1.99 13.61
2016-06 TBC 119.17 480,090 1.62 14.45
2016-07  TBC 120.32

484,716

0.96 12.30

 

What now for London house prices?

When examining the potential for London property investment, we’d expect a period of coolness as price rises revert to their long-term average. But we don’t foresee a collapse in prices.

One reason for this is that the fall in the value of the pound on foreign exchange markets has made London property cheap in foreign currency terms. Here at YPC Group, we’ve seen a distinct pick-up in interest from foreign investors, happy to be buying at even better value today than they were at the beginning of June. This should help limit any price damage from domestic post-Brexit jitters.

The fundamentals are extremely strong for London property

Property prices tend to move for a number of reasons. While short-term sentiment can cause sellers to drop price expectations and buyers to overpay, long-term property values are determined by property market fundamentals. And the long-term fundamentals underpinning London’s property market have rarely, if ever, been stronger:

  • Infrastructure build is at record levels, with projects such as Crossrail and High Speed Rail set to transform travel, business, and localised economies
  • Developers are racing to regenerate London, tearing down the old and modernising great swathes of the city
  • Despite fears of a Brexit fallout and withdrawal by the world’s major banks, the number of finance jobs advertised in the City has increased since the Brexit vote
  • Demand for housing is set to grow with the population

Taking this last point in particular, the Greater London Authority conducts regular population analysis. Today the population of London is around 8.75 million. This is forecast to grow to 10.8 million in 2041. These new inhabitants will all need housing. Demand for housing in London is already outstripping supply, but looks likely to grow even faster in the next two decades.

Property investment demand v. organic demand in London

In a simple property market, values are driven by a simple supply v. demand scenario. We’ve already seen that demand is set to grow dramatically over the next quarter of a century.

However, the London market is more complicated. There is a large investor base, and often the dynamics that drive investor demand are different to the dynamics that drive organic demand. Investors are concerned with capital growth and rental yield. Their ability and willingness to invest is also determined by the cost of financing and the supply of suitable properties.

I’ve been around long enough to know that property prices don’t only go up. I’ve also been around long enough to say that the next few months could produce the kind of market that enables savvy property investors to buy quality product at real value. If sentiment in the market falters, then we could see current investors and homeowners seeking to take profits. That could give long-term investors the opportunity to negotiate very favourable terms.

Investors should remember that:

  • Current rental yields in London average around 4.5%
  • Long term, London properties have increased in price by around 8.8% per year on average
  • The average house price in London has increase by around 12.3% over the last year

Finally, invest for the long term

For long-term investors considering investing in either London property or a FTSE 100 portfolio, here are four charts that tell their own story:

London_House_prices_change_from_5_years_ago.jpg

FTSE_100__Change_from_5_years_earlier.jpg

London_House_prices__change_from_10_years_earlier.jpg

London_House_prices__change_from_10_years_earlier-1.jpg

For long-term investors, London property is less volatile than the stock market, produces as good as or better income yield, and higher capital growth in the good times and lower and less frequent falls in value in the poor times.

So, in answer to the question “Given that the London market in particular is slowing, is property still the best investment?” I’d have to answer with a resounding, “Yes.”

To discuss property markets or your individual objectives for your property investment, give my team a call on +44 (0)207 812 1255 .

Live with passion

Brett Alegre-Wood

>