As Safe as Houses?

The phrase ‘as safe as houses’ has been used in the UK since at least the mid-1800s.  In recent decades, this idiom has largely remained relevant to the experience of homebuyers in this country. Average house prices have been surging upwards since the 1960s, albeit with downturns lasting several years at the end of the 80s/early 90s and after the 2008 Financial Crisis. The events of the last few years have been atypical and have created unconventional market conditions, such as bond and equity performance following the same track.  So, with January 2023 being the fifth month in a row where average house prices have fallen, will house prices weather the storm and continue to be a secure capital investment?

The key driver in residential property prices remaining strong is demand. The National Housing Federation and Crisis from Heriot-Watt University have reported that 340,000 new homes are required to be built each year in England alone up until the mid-2030s to keep up with demand. Of this number, 145,000 that are suitable for first time buyers and low income households are needed. For 2020/21, there was only a 217,000 net increase in the housing stock, admittedly during the most severe impact of COVID-19, but over the last decade there has been a significant gap between the supply of houses and the demand for them. Where there is a gap between supply and demand like this, it will generally lead to price rises. In addition, the costs of raw materials and labour have risen sharply, making any new builds more expensive. This feeds through to the purchase price of new houses and can have an impact on existing housing stock in the surrounding area.

The argument against supply shortage led housing price increases is that effective demand is reducing. As high inflation has caused a cost-of-living crisis and increasing interest rates make mortgages less accessible, this is making it harder to fund house purchases, particularly at the lower end of the market. This is effectively pricing out many purchasers and ultimately reducing demand, even if the notional demand or want is there from individuals and families to own a home.

We have already seen the average age of the first-time buyer increase from age 28 in 2007 to 34 in 2022; house prices increases have risen faster than earnings in the period, particularly for younger people, who tend to be on lower wages at the start of their careers. In 1983, the average cost of a house was around 3.5 times household income. Today it averages around 7 times income, with London typically much higher than this. In 2018, the Institute of Public Policy Research stated that UK house prices on average needed to fall 30% (£64,000 at the time) to reach a ‘fair value’.  These conditions have led to marked increases in the number of people renting over the same period, with the number of private households renting almost doubling since 2007. In addition, the number of 16–34-year-olds living with their parents has risen steadily and was exacerbated by the pandemic where many returned to live in the family home. Demand may also be curtailing due to Brexit, particularly in the capital.  London has been a popular choice for foreign owners in previous decades; more punitive tax legislation on foreign ownership, the impact of the war in Ukraine and uncertainty surrounding Brexit, have reduced its appeal.

So, what conclusions can be drawn when trying to weigh up the pros and cons of residential property? Firstly, timing is a key consideration. Almost all studies estimate that the next year or two will see a fall in house prices, although figures range from 0% to -35% depending upon the source.  The fact we saw 5 consecutive months of house price falls would evidence the reality of this but then contrary to this and against all forecasts quarter 1 has seen prices creep back up despite interest rates still rising (now 4.25% at the time of writing). However, over the long term, the demand pressures are still there, be it for home ownership or rental accommodation. A fall in property prices could therefore present an excellent buying opportunity for a buyer with readily available funds and a longer time horizon. This can apply to capital appreciation in a buyer’s main residence or a Buy-to-Let (BTL) venture if an adequate rental yield can be achieved.

Over the very long term, one of the key factors in house prices will be the changing demographic of the country and what impact this will have, if any, on trends. The baby boomer generation hold a vast amount of wealth in property, with many seeking to release equity from the property to supplement their retirement and/or pay for long term care. Will the value of these family homes remain high as supply increases? And will the pandemic trend of moving away from urban centres towards the countryside continue and what impact will this have on property prices? Anyone considering a property purchase to hold for the very long term should at least consider the possible impact of these potential structural changes to the housing market.

What is clear is that the housing market has a less certain future than in recent years and the risks associated with residential property are presently higher. Even if average prices are expected to fall, the market is fractured and local market conditions are often more relevant than national statistics when buying or selling property. Location, location, location are  the three most important factors in determining the price of property; those in close proximity to local amenities, transport links, good schools and areas of natural beauty are likely to remain sought after. Whilst we know property has been ‘as safe as house’, this investment certainly presents a higher level of risk today.

This article was prepared by James Martin, one of our financial planners. We always appreciate your feedback. If you have enjoyed this article or have any specific topics you would like to see addressed in future newsletters, please email us at FPTeam@city-asset.co.uk.