Building up to a general election in just over 12 months’ time the coalition government seem content to preside over a mini house-price boom, and all the signs are, all things being equal, that national prices are set to rise by an average of something like 25% plus over the next 5 years.
What’s more it appears the rises are beginning to spread outside of the capital – where in some parts price rises have been exceptional – to the rest of the country.
Recently published reports from the likes of Halifax, Nationwide, Royal Institution of Chartered Surveyors (RICS), Savills the property agents, and The Office of National Statistics (ONS) all seem to conquer – a shortage of good property stock will see buyers driving up prices as they race ahead of wages. This will continue to lock more buyers out and drive them into the rental market. According to RICS, this fallout could even start to affect many middle-income families.
It’s very evident that there’s a desperate shortage of suitable housing stock in some areas. If the market is to operate effectively we need more homes to be built in areas where people want to live and work. The extension of the Help-to-Buy scheme announced in the recent budget will be welcomed by potential first time buyers and house builders. Although many think its adding fuel to the fire, and won’t necessarily help Generation Rent, it looks like it could be years before the supply / demand balance reaches some kind of equilibrium.
Low interest rates, a steadily growing UK population, particularly in London and the South East, lack of house-building, particularly during the recession, and more recently the re-emergence of cheap credit, with the various government schemes around Help-to-Buy, are all credible factors which are driving the property market higher.
As the economy shows signs of recovery jobs become more readily available and wages start to catch up with prices. Confidence is returning to homebuyers, as well as to the banks, allowing them to loosen lending criteria.
The Bank of England (BoE) may eventually bring in tougher lending criteria for banks and building societies, but it will likely balance this with a fear of killing off the recovery. The BoE is more likely to wait and see what effect the coming new tougher mortgage rules (to be introduced this month) will have before making any changes.
With the property market such an important part – you could say the mainstay and an election booster of the UK economy – any short-term increase in prices and house sales is nothing but good news. They will help the economy grow faster, but long-term, above inflation price rises could cause more problems for the economy – homes will be affordable only if wages increase substantially in proportion to property prices, and/or mortgage rates remain low, which inevitably will not be the case long-term.
Despite the relative confidence and consensus of the forecasters there’s absolutely no guarantee prices will rise exactly in line with these forecasts. Many existing borrowers will need to re-fix, especially those currently on interest only deals, so they are likely to be paying more on a re-payment basis.
The economy and the banks are by no means over the crisis yet. Things may seem rosy now but there are still threats on the horizon for the financial sector and if things take a downturn after the election, when the government is still trying to balance the books, the banks could take another hammering; job losses would return, and a hike in taxes could spark another dip in confidence.
Many mortgage brokers think the pension reforms announced in the Budget could result in a surge in buy-to-let mortgage applications and investments. This may also result in an increase in the number of borrowers with interest-only mortgages.
From April 2015, those aged over 55 will be in position to withdraw their entire pension pot as a lump sum. Only the first 25 % will be tax exempt, and the balance taxed at their normal marginal tax rate. This minimum age is set to rise to 57 from 2018, and then will be linked to rises in the state pension age from 2028.
Some have expressed fears for those who may spend their next eggs irresponsibly and Lamborghinis have been mentioned in the media quite a lot. Clearly investing in buy-to-let is preferable and more sensible, but there’s more to property investment than the average person realises. It’s easy for the unenlightened to get themselves into a lot of trouble buying investment property. See the article: Is Buy to Let a Good Investment?
Another worry is the way responsible landlords are being discredited by the antics of a few so called “property experts” who are advising people without any capital to “invest” in property using various risky no-money down schemes: using a bunch of credit cards for deposits is one example and the rent-to-rent idea is another. Seen the article: Landlords’ Reputations Put at Risk
For those of you who are willing to put in the time and effort; do your homework, develop your skills and take moderate risks, buy to let is still likely to be a very good long-term investment.
Tom Entwistle, Editor