Last Thursday, 22 Sept, the Bank of England (BoE) raised interest rates by 0.5 percentage points, to its current 2.25%, to control high inflation. The BoE joins several other central banks around the world who have also increased their bank rates.
Yet, with the possibility of recession looming ahead, UK property investors remain bullish about the UK property market. Sounds counter-intuitive, no? Read on to learn the the Top 3 Reasons why UK property remain a sound investment in current times.
Banks around the world are tightening policy following the US Federal Reserve’s third successive 0.75 percentage point increase. Switzerland and South Africa increased rates by 0.75 points, while Norway upped rates by 0.5 points.
The BoE’s interest rate hike to 2.25% last week was a smaller quantum than expected, but a rate hike ahead of the next scheduled rate announcement in November, has not been ruled out.
Pending official reports, the rate hike signals that the UK has slipped into a recession in Q3 2022. Inflation has hit 9.9%, whilst the value of the Pound has dropped. And yet, seasoned property investors remain bullish about UK property. Here’s why:
#1 UK Property Fundamentals: Critical Undersupply Drives House Prices for Decades to Come
The UK’s population has grown steadily over the years, especially in urban/ suburban areas. Official statistics indicate that 60% of population growth since 2000 has been due to migration.
Studies show the UK has had a housing supply gap of at least 1 million since 2004 and initial estimates show that 275,000 houses are needed per year until 2035 to balance demand and supply. However, housing construction has been unable to keep up. With the population expected to hit 70 million by 2028, the UK government now estimates that the requirement per year has snowballed to over 300,000! Realistically, construction will not be able to catch up, and demand will continue to surpass supply for years to come.
Housing undersupply is reflected in occupancy rates. 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%, i.e, only 1 out of 50 houses are available for rent/ purchase. This provides peace of mind for landlords of an active rental market out there (note: a balanced market has a vacancy rate of 5% – 7%).
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.
#2 UK Property A Safe & Natural Hedge Against Recession and Inflation
Property is the safest hedge against inflation and recession. It fits well as part of a diversified portfolio during times of uncertainty because it can enhance your returns and reduce risk. Stable rental income stream and capital appreciation is what you can expect from UK property especially if you invest wisely based on the right safety criteria.
Why? Because, recession or not, people need a place to live. In times of uncertainty, people prefer to rent rather than buy because of the flexibility it offers, hence rental demand can increase during a recession.
That said, property prices and valuations can drop because of recession, although popular locations (areas of growth) are likely less impacted due to ongoing demand.
Meaning, not all recessions lead to price drop, e.g. the recession of the mid-70s and -80s only caused real house prices to decline in line with inflation rather than an actual fall in value.
Property helps to hedge against inflation. As the cost of materials rise, property and rental values are bound to follow suit. With house prices soaring because of high driven by demand and low supply, higher bank rates makes it more challenging for locals to afford purchasing a property, relying instead on rental property. How well you sleep at night, however, is predicated on your investment fulfilling the fundamentals (see #1).
#3 Affordable UK Currency & Tax Reliefs Increases ROI
The fall of the currency may reduce the purchasing power of those residing in the UK, but for foreigners, a lower pound translates to greater affordability and the chance to invest in an area that is historically expensive. Investors can use this opportunity to hedge against the currency. This an excellent opportunity to invest in UK property because of its current affordability, or you can buy the Pound now for future exchange when the value goes up, or use it towards funding the completion of your UK property in the future.
The recently announced relief in the form of stamp duty cuts announced on Sept 23 also means investors save more and get a better return on investment from the onset. Hefty stamp duties are a barrier to investment, and can set you back on returns right from the start. The tax-free threshold for UK property buyers has now increased from £125K from £250K and is permanent, taking effect immediately. Stamp duty cuts will help stimulate the housing market, and also means that those who purchase property above £250K will save £2.5K.
There is opportunity in a crisis: now the perfect storm for investing in UK property. It’s normal for new investors to get the jitters, but recession is a natural part of market economies, having occurred cyclically almost every decade. Property values, unlike stocks, does not fluctuate wildly and is a natural hedge against inflation and recession. Seasoned investors play the long game, focus on long-term goals and are prepared for episodes of volatility. Removing emotion, filtering the noise of day-to-day headlines and looking beyond temporary fluctuations enable them to react rationally.
It is critical in the first instance for investors to have a game plan that will help you meet the criteria of picking the right city/country, and safely identifying the right projects to invest in, so you can sleep well at night while growing your wealth. It is also important to optimise your portfolio across all aspects of property investment, including financing, tax planning and property management to maintain a good return on investment.
Contact us to learn more about the CSI Property Game Plan and apply our proven S.A.F.E.T.Y. 1ST © Criteria and G.O.L.D.M.I.N.E. Strategy ©. Drop us a comment below or call us to schedule a free 1-2-1 IMPACT ASSESSMENT with one of our directors to find out how your property is performing, and how you can Optimise your portfolio for better returns.
By Vivienne Pal