What will 2016 bring ? Factors impacting the property market. – Katar Investments

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What will 2016 bring ? Factors impacting the property market.

As always when considering this, it is worth considering alternative investment opportunities as well as the economic factors impacting the property market.

Kensington

Here are the alternatives

Stock market :It takes a brave or well educated investor to invest in the stock market.

The price of oil which clearly impacts many of the largest multinationals and some of the old favourites e.g. BP and Royal Dutch Shell, has dropped to 11 year lows, and was an incredible 46% down in 2015. It has gone from an incredible $116 a barrel, to around $34 a barrel and it would take a brave individual to predict that price will rise in 2016 with supply continuing to come onto the market from all sides of the globe e.g. Iran, Russia, Middle East, USA.

The FTSE 100 :This started the year at 6560 and ended the year at 6242, with a downward run since a high of over 7000 in April caused by several factors including the slowdown in China, with Black Monday in August, the dropping oil price and uncertainty in Europe especially around Greece.

The big losses have been in some of the largest commodity companies with hits of 30-45% and massive losses of over 70% in Anglo American and Glencore in the mining industry.

There have been some successes of course, but how many of the experts predicted them, not many!

Managed funds? :Of course most people are busy and invest in managed funds which often have a large percentage invested in commodity shares which have suffered. Indeed the average fund performance has been relatively very poor last year losing 15% in value.

So the alternatives haven’t performed particularly well, which will ensure there is continued good focus on the property market as people continue to try and invest for their future and pensions.

So moving onto UK property – how has it performed in 2015? :Overall prices have risen as an average in the UK by 6-8% depending on which report you read.

What do we expect in 2016? :Looking at the basic economics, supply and demand should give huge confidence to anyone already invested in buy to let or considering it this year.

Demand continues to massively outweigh supply in almost all parts of the UK and with the population growing, this will continue into 2016.

Population of UK : Population grows by more people being born than dying in a year and more people moving into a country than leaving it in simple terms.

We can see that there was a reported net 163,000 people moved to the UK last year and 186,000 more people born here than died, leading to a growth of around 350,000 in the UK last year and a total population of 65 million.

So that is 350,000 more people needing housed last year than the year before! This is consistent with recent years and is approximately the predicted growth predicted for each of the next 5-10 years.

To give an idea of how far short the supply of housing is, between 2011-14 it was predicted that 974,000 new houses were required and yet only 460,000 were built ie less than half the required numbers and over 500,000 short.

It is commonly accepted that between 200-250,000 new homes are required each year in the UK, and with a population growth of 350,000 alone last year, never mind housing needing replaced, this is easy to agree with – and yet only around 100-120,000 houses are being built each year.

And this trend has been pretty consistent for 5 years despite government promises to reduce red tape and incentivise developers.

There were 1.2mil property moves last year, and with these levels, it highlights even with people staying put more often there is huge demand for property. And this is with the limited supply of property coming onto the market, which is the main reason this figure is not higher.

Borrowing rates :Interest rates continue at record lows and most experts have long since stopped making predictions on when these rates will rise. Expect them to stay unchanged in 2016. This will continue to mean attractive borrowing rates for homeowners and first time buyers, as well as buy to let investors.

Government intervention :Government schemes that have been set up to help the housing market or are due to kick in are:

Help to buy scheme  : This scheme in terms of getting first time homeowners on the ladder has been successful with some schemes seeing up to 50% of the development being sold in this way ie where first time buyers make use of this government scheme where 20% of the deposit is covered by the government. This has been extended and should continue to assist first time buyers for the next few years, who will only require a 5% deposit to move into a new home, assuming they pass the affordability requirements to borrow the 75% mortgage.

So this will continue to mean strong demand for new build property, especially of starter family homes.

Stamp duty increases : This kicks in from April 2016 and means buy to let investors will now pay an additional 3% stamp duty on any properties, from £40,000 upwards, compared to first time buyers/owner occupiers.

This is an understandable government scheme to try to reduce the demand from buy to let investors and increase the chances of homeowners being able to buy.

Personally I think reducing red tape and making it easier for developers to develop would be more beneficial than trying to de-incentivise private landlords, who provide an essential role in UK housing, however with the government under pressure from all sides, this will help appease groups like Shelter and Generation Rent.

Will it make much difference overall to prices? : With such low supply, and high demand it is hard to imagine prices will see much impact – but the percentages of owner occupiers should increase slightly compared to buy to let investors.

However with attractive borrowing rates, and projected capital growth of 5-8% next year along with increasing yields, I don’t see many buy to let investors not continuing to invest.

Rental levels : It will not surprise to see based on the above information that average rents also increased across the UK by an average of 6-8% in 2015.

With big demand and limited supply, this is basic economics.

And with more people coming to the UK every year, and limited development, this will continue.

Summary

The major economic factors impacting the UK property market have been remarkably consistent for the last 5 years with consistent trends.

  1. Growing population
  2. Low supply of new housing – 50% of target
  3. Incredibly low borrowing rates

With this in mind and the Help to Buy scheme being extended, and the relatively poor performance of alternative investment options I would confidently expect a similar trend in 2016 of average price increases across the UK property market of 5-10% and rental figures showing a similar increase.

As always buy well at attractive prices, and do your local research, but the consistent indicators show that property will continue to perform well in 2016.