The Continuing Rise of Property

House prices hit the headlines again this month as new statistics confirmed that the price of the average home in Britain had passed the £300,000 mark.

On 21st March, Rightmove announced that the average asking price now stood at £303,190. That compares against just £200,980 in 2006. In other words, across the country, capital appreciation has put more than £100,000 on the price of a typical home, or to put it another way, values have risen by over 50%. Over the same period, average earnings rose by just 22%.

Importantly, Rightmove’s numbers are in clear agreement with those of the Office for National Statistics, which previously reported that average selling prices reached the £300,000 mark in the year to October 2015.

While this widening gap between earnings and prices is a persistent headache for government, it also demonstrates the outstanding robustness of property and an investment vehicle. The ten years from 2006 to 2016 saw one of the most severe recessions in recent history – widely termed a ‘global financial crisis’ – and yet despite this, long term gains have been excellent. Those who invested in property in 2006 might have been shaking their heads in despair at the market slump that followed, but if they held their nerve and stuck to the principle that property investment is a long term venture, then by 2016, their average gains will have been significant.

What’s more, those gains only take account of capital appreciation. In addition to appreciation of 50% over ten years, most landlords will also have been enjoying good incomes in the form of rentals. With the cost of borrowing very low for much of this time, that will have translated into healthy cashflow and profits.

Of course, everyone appreciates that past performance is no indicator of future outcomes and just because property has been a reliable vehicle despite the recent economic turbulence, there can be no guarantees that the next ten years will be so rosy.

The future is always an unknown and, thus, every investment will carry an element of risk. However, the role of a good investment house is to use all available information to keep those risks to an absolute minimum. In the case of property, we believe there are still very good reasons for believing it will continue to afford a safe haven for hard earned savings.

Firstly, and most obviously, all the leading sources of price indices and forecasts are predicting steady price growth over the next five years. The figures aren’t as impressive as the post-recession price surges that accounted for the market’s rapid recovery but they are expected to be sustainable and to keep outpacing both inflation and wage growth. Figures vary by source but most are estimating average growth of between 17 %and 20% over the period 2016 to 2020.

Then there is the question of London. Described by some as ‘another country’ where the usual rules of supply and demand have largely gone out of the window, it has become a fractured, unpredictable market and there is now a big question mark over prices in the capital. Its stratospheric price rises have been inflating average UK values for years now, but there is a growing sense that the central London market has passed its peak. Now, foreign investors are looking further out – not just at the South East but at regional markets too, where lower prices translate into higher yields.

At Solomon, we have direct experience of this growing overseas interest, having recently signed deals with agencies that specialise in finding property for wealthy investors from the Middle East. There are suspicions that parts of London are now so expensive that they are unlikely to produce substantial further price growth. Consequently, markets such as the North West, Humberside and the East Midlands are now attracting increasing foreign interest.

This tendency for investors to look beyond the capital was noted in The Times (March 21st) in an article commenting on Rightmove’s announcement about recent gains. The article stated: “The annual rise was driven by a property boom that has spread north and west beyond Greater London. Record asking prices were set in six out of ten regions, including the West Midlands, where prices rose by 5.5 per cent annually… and in the North West, where they increased by 3 per cent.”

More generally, despite market interference from an increasingly unpopular Chancellor of the Exchequer, the property market looks set to remain a dependable investment vehicle. The vast gains of the last five years are giving way to more moderate returns but they still look attractive when set against woeful interest rates on savings and the continuing volatility of stocks and shares.

Most informed opinion seems to regard slow but steady growth as the most likely result for property investors. It’s an argument that is underpinned by some compelling evidence. The economy is recovering, unemployment is falling, the population is rising and demand for housing is exceptionally strong. As a result, the market is set on a strong foundation and prospects for continuing capital growth look very good indeed.