Squeeze on buy-to-let profits appears to be ending

House prices and rents are growing

The latest property news reads well for investors. Property price growth has stabilised, as have average rental yields, while rental prices are rising. No one is now forecasting a Brexit-induced crash in property price. The news flow indicates that the squeeze on buy-to-let profits may be coming to an end.

House prices grow at 2.5% per year, quarter on quarter

House price growth remained steady in March 2018, with the average UK price of £211,729 up 2.5% in the March quarter of 2017. Overall, this means that house prices across the UK are an average of 16% higher than they were before the Global Financial Crisis hit, according to data from the Nationwide House Price Index.

In England, the average house price rose by 1.9%, though this figure is held back by London prices, which declined by 1%.

The North of England was the country’s best performing area, with price growth stronger than at any time since 2014. On a quarterly basis, average house prices have grown most over the past year in:

  • West Midlands (+4.9%)
  • Yorkshire & Humberside (+4.5%)
  • North (+4.1%)
  • North West (+3.2%)

Only in London did the average house price fall, with average prices in the South West, East Anglia, and outer South East all between 2% and 3% higher in the first quarter of 2018 compared to the first quarter of 2017.

This is the fourth quarter in a row that house prices in the northern regions have performed better than those in the South. Further, while house price growth has been slowing in the South, it has been gathering pace in the North. However, this still means that house prices in the North are, on average, less than half those in the South (£163,138 compared to £331,047).

Average rents rise by 3% and yields stabilise

The latest rental price index, this one from Your Move, shows that rents in England and Wales increased by an average of 3% between February 2017 and February 2018. It also indicates that rental yields have stabilised, at an average of 4.4% – the same average yield as posted in January 2018, but down slightly from the 4.63% yield posted a year earlier.

Only two regions saw average rental prices fall – London and the North East – while the highest rental rises were recorded in the East Midlands and East of England.

The North East has the cheapest rental prices in England (average £535 per month), while London has the highest (£1,276 per month). However, the North East offers the highest average yield (5%), while London offers the lowest (3.2%).

What does all this really mean for property investors?

When the UK electorate voted for Brexit, most so-called experts predicted that property prices would collapse. That hasn’t happened. What we are starting to witness is a closing of the ‘North-South’ divide. After the GFC, house prices in the South recovered far more strongly than those in the North. This dynamic is shifting. I would expect further closing of the gap to occur over the coming years, especially as we move closer to High-Speed Rail and the benefits it brings to cities in the Midlands and the North (such as Birmingham, Leeds, and Manchester).

Why are house prices rising slowly now?

I’ve been asked why house prices are rising only slowly when employment is rising fast and wage growth has begun to pick up. Especially with historically low interest= rates, you might expect house prices to be rising faster. So, why aren’t they?

The reason, I believe, is the squeeze on household income. Sure, wages are now rising faster than they have for some time, but so, too, is inflation. There are a few pounds less in people’s pockets, despite wages going up. However, this is beginning to reverse. Historically, when unemployment and interest rates have been low, house price inflation has followed. Moving into 2019, I’ve got a sneaky suspicion that house price growth could gather pace once more. Also, I think that most people now understand that a Brexit-induced crash in UK property prices is off the cards.

Meanwhile, rents are rising in most areas. The market has stabilised. This suggests to me that the recent squeeze on buy-to-let profits and income (such as it was) is ending. That’s great news for all property investors.

Do you want to know where you should be investing in 2018? Contact one of our team today on +44 207 923 6100 and sign up for the Gladfish Newsletter to stay abreast of all the property investment news that matters. We give it to you straight. No BS. No hype.

Live with passion

Brett Alegre-Wood

Brett Alegre-Wood
April 13, 2018

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