Savvy property investors pinpoint demand to pinpoint future value
When you invest in property for the long term, just as when you invest in any other asset, one of the factors that determine value is a simple economic rule: supply and demand. When demand outpaces supply, prices will rise – and vice versa. If you could only tell which towns and cities across the UK have the greatest imbalance of supply and demand, you’d have a good pointer to future price and rental growth potential.
In this article, we look at the latest research, which shows just how out of sync supply of new homes is with demand in the UK, and what that could mean to you as an investor.
Why does demand for new homes rise?
In a simple phrase, population growth. And when considering population growth, the property fundamentals are what drives demand:
- Transport links
- Major employers
- Major investment
If you consider these factors on a national level, you’ll see why so many people want to immigrate to the UK.
As the fifth largest economy in the world (something I don’t think Brexit will change), the UK sucks in investment by businesses. Latest figures have shown that foreign business investment in the UK is at a record high, despite Brexit looming. It creates jobs and increases tax revenues.
Tax revenues are spent on lots of things, including education and transport infrastructure. Think High-Speed Rail, Crossrail, investment into airports and roads, etc. More advanced transport options make business easier to conduct (regionally, nationally, and internationally) and bring added opportunities for commuters into towns and cities.
It’s not only public money that is being invested in Britain’s towns and cities. To satisfy a growing population, cities like Manchester, Birmingham and Leeds are witnessing huge private investment. Money is being poured into developing shops, offices, commercial premises, and, of course, new build homes. Businesses are rushing to open new operations in cities that will become better connected and that benefit from highly educated workforces.
Demand for new homes in the UK is exploding
We know that Britain is open for business. The most recent UK population forecast has projected that the number of people living in the UK will explode to 70 million within 10 years, from its current level of 65.8 million. That’s more than 4 million people who will need housing.
Homebuilders are unable to keep pace with demand
Homebuilders have not been able to keep pace with this demand for decades. Again, recent figures show that housing starts reached their highest level since June 2008. At 165,000 new build starts, we’re building 35,000 fewer homes every year than we need to. (You can read more in my article ‘Good news for property investors – housing starts are way short of demand’.)
House prices are rising faster than general inflation
If demand is outpacing supply, you’d expect house prices to be rising. And they are. In fact, according to the latest Halifax Price Index numbers, they are now rising faster than they have since the beginning of the year. Rightmove have seen a similar outcome from their data, with house prices up by 1.1% in October compared to September.
General inflation is at around 3%. Halifax says that house prices are up by 4% in the quarter to September compared to the same quarter last year and that the rate of price growth is increasing.
While others predicted a collapse, we called a slowdown and then house price acceleration
These rises are confounding the so-called experts who, almost to a man, predicted that house prices would tumble following a vote to leave the EU. All we have experienced is a healthy slowdown in the rate of price growth, and now the rate of price growth is starting to gather pace again.
Does this scenario sound familiar? It should because it’s exactly as we predicted by looking at history to analyse property prices post-Brexit. When supply cannot keep pace with demand, house prices will rise.
Where is demand greatest?
Research by Minerva Lending PLC has thrown new light into the supply/demand equation. They have analysed data from the Office of National Statistics and uncovered the fastest-growing towns and cities, and compared them with the number of new homes built. Their research examines a five-year period, between 2011 and 2016.
Of the big cities in England, Manchester is most out of sync. It has more than eight new residents to every new home built during the five-year period. Even in London, where price growth has stalled recently, there are five new residents for every new home built.
Minerva found that only two towns or cities in the UK are shrinking, and have a negative new-residents-to-new-homes ratio: Blackpool (-4.0) and Blackburn (-0.5).
Where should you be investing in property today?
Of course, the data crunched by Minerva is historic. Going forward is a much more difficult projection to make. But, just like we called the house price move post-Brexit, we won’t shy away from what we think is the call for property investment potential of the UK’s towns and cities.
We think Manchester will remain on the list of highest new residents vs. new homes over the next five years. We also expect Birmingham and Leeds to be equally unbalanced when it comes to demand vs. supply. Both cities will benefit hugely from High-Speed Rail, and both are overflowing with the property fundamentals that drive demand for property.
What about London? We don’t think that London prices will crumble. However, we would expect affordability issues to encourage some Londoners to move out of London, and this could push commuter towns up the list of unbalanced demand/supply. (Here’s a tip: locations such as Sevenoaks look particularly attractive.)
Do you want to invest in tomorrow’s UK property hotspot today?
Our property projections aren’t made by sticking a pin in a piece of paper. We don’t draw names out of a hat. What we do is analyse 108 data points across 324 UK areas. It may just be the most comprehensive property analysis in the market today, and a research strategy that has consistently proved to uncover the best property investment opportunities in the UK.
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