House prices are continuing to rise, so this seems a fair assessment. But is property investment still a good plan in the long-term?
A key factor driving house prices upwards is that demand for new homes outstrips supply. Green belt restrictions are an essential consideration here, essentially limiting the expansion of many of our urban areas. Approving more land for housing is, however, unlikely to solve the supply shortage on its own.
A lot of land that is approved for development is not even in the hands of a house builder. The landowner’s choice is between striking the best deal today and waiting for a better deal at a later date, based on the expectation of increasing land prices.
The housing market has stabilised at much higher valuations than were previously reckoned possible. A common measure of affordability is the ratio of average house prices to average earnings. Homes are nearly as overvalued as they were at their peak before the great financial crisis.
In London and Dublin, affordability metrics appear to be defying gravity. But comparing prices to average incomes is less relevant there because large swathes of these cities are owned by overseas investors.
The buy-to-let phenomenon got going in 1996, with the introduction of mortgages which no longer required the borrower to live in the house. However, there are signs that UK regulatory changes have begun to send the buy-to-let boom into reverse.
In 2016 the UK government introduced a 3 per cent stamp duty surcharge on top of normal stamp duty rates for those buying second homes. It abolished a generous wear and tear allowance for those letting furnished properties and began tightening the rules on how landlords write off interest costs against income tax. These changes are enough to turn healthy annual profits into losses.
It is the challenge for policy-makers to ensure that more homes are built, to address inadequate supply. On the demand side, higher valuations deter purchases, and aforementioned tax and regulatory changes have made buy-to-let less attractive. When home-buyers work out whether a property is affordable or not, the cost of servicing a new mortgage as a chunk of take-home pay is now what matters.
The decline in borrowing costs over the past decade goes a long way to explaining why house prices have proven so irrepressible so far in this economic cycle. However, it is probably just a matter of time until we see higher interest rates again.
All of this suggests that in the medium term, the chances are that real house prices will revert to their trend of being flat over time or increasing at most 1 per cent a year.
After accounting for fees, tax, and the advantage of living rent-free, this makes the benefits of owning and occupying a house comparable to the expected return of a moderate risk financial portfolio – albeit without the robustness, conferred by carefully judged diversification across industries, countries, and asset types.
These are our current opinions but the future, as ever, is uncertain and past performance of investments is not a reliable indicator of future performance. If you’re not sure about investing, seek independent advice.
Claire McCombe is a private banker at Barclays Wealth & Investments.
Source: Irish News