UK residential housing market bubble? “maybe” says Governor of the Bank of England? – Katar Investments

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UK residential housing market bubble? “maybe” says Governor of the Bank of England?

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Why do landlords purchase residential property?
Income from rental income or capital appreciation?
How many landlords are there in the UK and what do their portfolios look like?

Within this article are some interesting statistics and market commentary that seeks to clarify the questions posed above.

According to recent research in the Times they estimate the total value of the residential UK buy to let property market at £989 billion. There are 2 million residential landlords owing on average 4.9 properties each. The average age of these buy to let landlords is 56 years old and they account for approximately 18% of the total UK homes privately owned.

These numbers and statistics are all very well and good however one of the figures from the research caught our attention. The average NET yield being achieved by these 56 year old buy to let landlords with 4.9 properties each is between 2 and 3% NET. In the eyes of many of our clients this would not be considered attractive.

This data would suggest that a large number of landlords from this research are based in the South East and London where capital values are significantly higher and the reflective yields then tend on average to be significantly lower. These types of property investors tend to be looking at long term capital gain rather than seeing high ongoing yields against capital invested. Of course income is important to them it all depends on cash on cash returns.

Considering this the governor of the bank of England has speculated recently that the UK market in London and the South East in particular could be reflecting a housing bubble. Affordability for the average person is becoming an increasing problem and lending criteria is still tight for buyers even with historically low interest rates. With so much capital seeking the security perceived in the London and South East markets there are contradicting opinions on this with others stating that the markets will be safe havens for the wealthy domestically and from overseas.

Different regions of the UK offer significant variety in potential rental yields, capital entry levels and value potential. The North West and Manchester in particular holds a strong position in the market often we are asked by clients in South East and London for opportunities in the North of the UK as it is considered that the yields in these locations are stronger and in turn the capital values also have more room for growth over the medium to longer term. Whether this is speculation or correct commentary on this is fuelled off the back of the governments focus on the Northern Powerhouse and the £7 billion infrastructure investment going into the region should offer a boost to the residential housing market.

More recently research published by Chestertons has shown that the London property market in terms of transactions has slowed more recently. The purchase of flats in the UK has risen significantly in the past 10 years and there has been a 28% increase in the number of single people living in shared accommodation (flat shares and co habitats).

Rental markets in the UK continue to show continued growth although slower than in previous years. According the Homelet Rental Index as of August 2015 average UK rents were at £992 Per month. Average rents in London at the same point were at £1558 growing at a higher rate than the rest of the UK.

So based on the above if a buy to let landlord was to look wider than the London and South East they could secure a higher yield if the occupancy can be achieved, should capital values continue to increase and thus reduce yields in the North (assuming that rents do not rise in correlation to this) then an argument could be made for higher growth in property values in the North relative to the South over the medium to longer term.

Other research we have read through recently show that on average over the next 5 years in the UK it is expected that the UK residential property market will increase between 20 and 30%. Wage growth more recently has not kept pace with property value increases so at some point there must need to be a correction as the question of affordability and the lack of new buyers entering the housing market becomes more of an issue. Some of those priced out of the market will have no option but to rent and so this plays into the buy to let landlord’s hands.

So why are we sharing this with you? What are the fundamental reasons why Buy to let landlords enter the UK housing market? We cannot provide a broad brush answer to these questions as most buy to let property investors buying and investment criteria is different.

We feel confident in stating that income achieved from residential property purchased for rental income can offer an excellent addition to a client or existing landlords ongoing monthly cashflow depending on how the new purchase is financed). Taking a longer term view on the market over time the UK residential property market offers excellent prospect of increased capital values on well located properties into the future.

We have always believed that buying property for rental income and cash flow first and foremost offers a sound strategy, well located, high specification and suitably priced properties should provide for key ingredients underpinning a sound long term strategy for wealth generation and capital preservation.