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UK Property Market Mid-Year Update 2022

How is the UK property market performing thus far? With pandemic fears and lockdown restrictions a thing of the past, the UK now faces rising inflation and new political upheaval with Boris Johnson stepping down as Prime Minister. How will this affect UK property investors? Read on to learn more. 


Contents:

  1. Currency Updates
  2. UK House Price Performance 
  3. UK Property: Demand VS Supply 
  4. Rising UK Interest Rates & Its Implications
  5. Inflation: What Does This Mean for UK Property Investors? 
  6. Conclusion: How Well Will You Sleep At Night? 


Updated 5 Aug


Plenty has been going on in the UK lately. Inflation is on the rise, resulting in interest rate fluctuations. Over at Downing Street, history has repeated itself with the Prime Minister announcing his resignation following intense pressure from his own party
, following a string of scandalous political shenanigans. 

Naturally, there are consequences. We explore the consequences affecting property investors below.

UK Property Investment: How Well Will You Sleep At Night?
Fact vs Headlines 

 

  1. British Pound Sterling (GBP)

The GBP’s current rate of approximately GBP1 : SGD1.66 (MYR5.3) is a fall from its previous high in 2021, but the decline has been a gradual one—driven by longer-running factors and ahead of the political drama. The pound was more affected by the EU Referendum and Brexit, briefly earning itself the nickname of ‘HM Government’s Unofficial Opposition’.

Recent political shenanigans and Boris Johnson’s resignation had little effect on the British pound. The fall in currency value presents opportunities for the astute UK property investor. Source: Refinitiv. Image Credit: The Financial Times

Astute investors generally have no intention to flip their UK property investments within the short term, hence the fall in currency value is viewed as an opportunity. The affordability of the GBP makes this a good time to reinvest or increase investments. This is also a good opportunity for investors to buy the pound ahead of time to pay off the completion of your property in the future. 

  1. UK House Price Performance

The past few decades have shown the resilience of UK property values, which have continued to march onward and upward, undaunted and unscathed. It continues to do so now, unfazed by Brexit, Covid-19, and even Boris Johnson! The average UK house price level reached £283,000 in May 2022—its 7th consecutive month of increase— with Manchester remaining the fastest-growing city in the UK. (viv insert internal link and find the facts for it).

UK property values continue to rise, with the average UK house price increasing to £283,000 in May 2022. Source & image credit: ONS
UK property values continue to rise, with the average UK house price increasing to £283,000 in May 2022. Source & image credit: ONS
  1. UK Property: Demand VS Supply

The UK’s population has grown steadily over the years, especially in urban/ suburban areas. It’s a place where everyone wants to live: official statistics show that 60% of the population growth since 2000 is due to migration. The population is expected to hit nearly 70 million by 2028, but the country has been facing a dearth in house construction over the decades. Meaning, there is a shortage of housing not just for the future population, but also the current population, to live in. 

See also  Global Property Outlook 2022
The UK population has increased steadily over the years, but there is a shortage of housing not just for the future population, but also the current population, to live in. Source: Source: (*) Heriot-Watt Additional supressed household formation p.63, Redfern KPMG The Barker Review. Image credit: BBC
The UK population has increased steadily over the years, but there is a shortage of housing not just for the future population, but also the current population, to live in. Source: Source: (*) Heriot-Watt Additional supressed household formation p.63, Redfern KPMG The Barker Review. Image credit: BBC

Studies have shown that the UK faces a housing supply gap to the tune of at least 1 million since 2004. To balance demand and supply, 275,000 houses are needed per year until 2035, but construction has been unable to keep up, causing the estimated number of houses needed annually to rise. In 2022, the UK government now estimates that the number of houses required per year has snowballed to over 300,000! Given that the supply of new houses will not be able to realistically meet this estimate, the UK will face a housing shortage for the next decade. 

The UK government estimates in 2022 that the number of houses required per year has snowballed to over 300,000. Source: DLUHC, Live Table 120; Bramley (2018); Conservative Manifesto 2019. Image credit: House of Commons Library, UK Parliament
The UK government estimates in 2022 that the number of houses required per year has snowballed to over 300,000. Source: DLUHC, Live Table 120; Bramley (2018); Conservative Manifesto 2019. Image credit: House of Commons Library, UK Parliament

   – Occupancy & Vacancy Rates

The demand for houses is reflected in occupancy rates. The greater the demand, the greater the occupancy rate. Among top global cities, London and Manchester—the UK’s fastest-growing city—hold some of the highest occupancy rates at 98%. This means a vacancy rate of 2% which, in simpler terms, means that only 1 out of 50 houses are available for rent/ purchase. This is reassuring for landlords, providing peace of mind that there is an active rental market out there. Note that a balanced market has a vacancy rate of 5% – 7%. 

Occupancy rates reflect the demand for property in a location. London and Manchester having some of the highest occupancy rates among global cities in the world. Source: SQM Research (AU), Zhiru Tan et al (CN), Zibel (DE), Department for Levelling Up, Housing and Communities and Ministry of Housing, Communities & Local Government (GB), Rating and Valuation Department (HK), Savills (JP), Statistics New Zealand (NZ), JLL (PH), Urban Redevelopment Authority (SG), U.S. Census Bureau (US). Note: SG, PH 2022, US, UK, AU, HK 2021, NZ 2018, rest 2020
  1. Rising UK Interest Rate & Its Implications 

Supply chain disruptions and higher energy prices have put pressure on the global economy and raised the cost of living. Inflation has driven interest rates, not just in the UK, but in other major economies globally. As a result, the Bank of England (BoE), battling a 4-decade-high inflation, has raised interest rates from a historic low of 0.1% set during the pandemic, to the current 1.75% (Aug 4) to stem the pace of inflation. In fact, the BoE was the first among its major peers to begin increasing interest rates Dec 2021.   

If you have an outstanding housing loan in the UK, a way of preventing rising rates from affecting your investment’s cash flow is by fixing your mortgage rate. That said, current mortgage interest rates are still very low compared to 20 years ago. 

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The Bank of England was the first among its major peers to begin increasing interest rates Dec 2021. On Aug 4, interest rates were increased to stem the pace of inflation, from a historic low of 0.1% set during the pandemic, to the current 1.75%, its highest in 27 years. Source: Bank of England. Image credit: Yahoo! News
The Bank of England was the first among its major peers to begin increasing interest rates on Dec 2021. On Aug 4, interest rates were increased to stem the pace of inflation, from a historic low of 0.1% set during the pandemic, to the current 1.75%, its highest in 27 years. Source: Bank of England. Image credit: Yahoo! News
  1. Inflation: What Does It Mean for UK Property Investors? 

Real estate has been traditionally viewed as a safe investment asset because of its inflation hedging capability compared to other investment vehicles such as stocks and bonds. In the UK, inflation hit 9.4% in July, its highest level in 40 years. With the price of materials increasing, property and rental values are bound to follow suit. However, and very importantly, how well you sleep well at night, is predicated on the location of your investment fulfilling the fundamentals as discussed above.

Case in point: 

As of July 2022, Rightmove notes that rental rates, driven by a shortage of availability, have risen by 19% on average across the UK since Covid-19 struck two years ago (the same growth in rents that took eight years pre-pandemic to reach). In the red-hot Manchester housing market, where there has always been fairly fierce competition among rental homes, high demand and low supply have driven prices to the highest level in 16 years! Rents in Manchester have risen by 23.4% in the last year alone. 

Conclusion 

The news headlines—as they are wont to do—inspires fear and little confidence. While it is important to stay abreast of current happenings; as investors, it is also important to be clinical in our assessment. Investing wisely means understanding and applying the right strategies and criteria because, then, you are able to ignore the noise, look at the facts, find the opportunities and feel confident of the performance of your investment. 

Note: The update was originally presented to the CSI PROP community in July 2022.

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By Vivienne Pal

  • https://www.ft.com/content/708a7f32-90a3-4082-b851-0ddae0b367ba
  • https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/housepriceindex/may2022#:~:text=The%20average%20UK%20house%20price,to%20%C2%A3165%2C000%20(10.4%25)
  • https://news.files.bbci.co.uk/include/newsspec/pdfs/bbc-briefing-housing-newsspec-26534.pdf
  • https://researchbriefings.files.parliament.uk/documents/CBP-7671/CBP-7671.pdf
  • https://www.bbc.com/news/business-61801362
  • https://www.reuters.com/world/uk/bank-england-raise-rates-by-25bps-aug-4-50-close-call-2022-07-26/
  • https://www.manchestereveningnews.co.uk/news/property/rents-rise-again-manchester-average-24482139
  • https://www.rightmove.co.uk/news/rental-price-tracker/
  • https://malaysia.news.yahoo.com/bank-of-england-interest-rate-hike-mpc-inflation-110404272.html

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