Tuesday, 13 March 2012

Which way next for the Residential Property Market in the UK?

I have carried out some research looking at the current state of the UK residential property market and where it currently sits in an historic context.

Using data from Haver Analytics and other sources, I reviewed the relative affordability of UK house prices with a view to determining whether current levels look cheap or otherwise.  Tracking back to 1974, it is apparent there is a clear correlation between house prices and affordability.  It is equally clear that this broke down decisively during the first decade of the 21st century.

Looking at the last ten years in more detail, the scale of this is evident, with property and, by inference, relative affordability shifting dramatically.

However, the last few years have seen a marked change, especially outside the property hotspot of London.  In nine of the last ten quarters, property has declined in real, inflation adjusted terms.  Unfortunately, average earnings have declined at the same time, meaning that this fall has not really affected the relative affordability of property.
Past performance is not a guide to future performance
So where to next?  The current measures being adopted in the UK and across Europe are likely to create quite a headwind for the economy to battle through over the next year or so.  Against this background, average earnings are unlikely to move ahead sharply.  We do not foresee, however, an environment in which the property market is hit by a wave of selling.  Unlike Spain and Ireland, there exists in the UK a structural shortage of property which has long been the justification for the charts above.  We see, rather, a period more closely akin to that of the nineties, in which residential property does very little for a protracted period.  Only when some shift is seen in average earnings do we expect the conditions to be ripe for any meaningful increase in property values.

For investors looking for longer term, real (i.e. inflation adjusted) returns, we continue to favour a well diversified portfolio which, depending on your individual circumstances, contains a substantial equity content.

ROB BURGEMAN

4 comments:

  1. Great and fascinating insight into the trends of affordability Vs average earnings. It is already quite clear that buyers cannot afford to buy houses at relatively the same prices that they have been held at over the last three years, especially with limited access to mortgages. I am also not convinced that the situation will be helped remarkably by the introduction of the NewBuy Scheme, although there has been an uplift in sales to complete in time for the stamp duty freeze. It is also interesting to note the peak of property prices during the latter part of 2007 and early 2008 and how the property prices rocketed at this point. I agree with you that there will be a stagnation until the earnings pick up again and/or the property prices come down further to gain affordability for those trying to buy at a sensible price.

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  2. Thanks for your comments. I quite agree with your viewpoint too. I suspect that the New Buy scheme is rather more to do with employment in the construction sector and the multiplier effect of this kind of work throughout the economy than an attempt to hold up property prices. There is, too, a certain political expediency in being seen to support the sector at a time when the wider economy is seen to be struggling.

    ROB BURGEMAN

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  3. Hi Rob, the trend does seem to indicate that the the index and therefore property prices "over-correct" by looping down below the average earnings line for an extended period. Do you see this as a likely eventual result this time? To what extent do you think that "cascading wealth" will help to prop up the property market?

    Martin A

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  4. Hi Martin,

    I rather suspect that is what will need to happen for the market to return to its long term trend, rather than a dramatic collapse in house prices, and, as ever with these kind of corrections, it may go on for too long. Cascading wealth may help, of course, but increased longevity and pension reforms may mean that this cascade may not be quite the raging torrent that people expect.

    ROB BURGEMAN

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