The report published today by Acadata will no doubt prove to be interesting food for thought for property investors in the UK. For the first time in six years the annual increase in UK house prices has fallen into negative territory. In the 12 months to the end of January 2018 the value of the average UK home fell by 0.4% with London showing a fall of 4.3% in the final quarter of 2017. These are obviously worrying times for UK property investors but is it simply a consolidation of recent gains or the start of a significant downturn?
THE RECENT SLIDE CONTINUES
Since Brexit was announced there has been a significant slowdown in the growth of UK house prices. Indeed, while we are currently looking at house price depreciation of 0.4% over the last year it is worth noting that in August 2014, when the recovery was underway, annual house price growth came in at just over 10.6%. In more recent times we saw a peak of 5.65% growth in May 2017 which proved to be the start of a continuous slide. It will come as no surprise to those who follow the UK housing market that prices are under pressure but it is worth noting the significant increase in recent times.
MORTGAGE APPROVALS UNDER PRESSURE
These are potentially worrying times for UK property investors because despite the fact the UK government has introduced an array of financial assistance programs for first-time buyers, mortgage approvals fell to a near three-year low in December. It is difficult to gauge with any real confidence underlying demand for UK property at the moment. On one hand we have a significant reduction in the value of sterling over the last 18 months, which should play into the hands of overseas investors, while domestic demand is most certainly under pressure. Interestingly, while there has been significant reduction in the value of sterling against major currencies, the expected boost from overseas investment has fallen flat.
Similar to the US, many experts believe that the Bank of England will introduce at least two relatively small interest rate rises during 2018. A similar situation is forecast in the US with both the US and the UK looking to ensure inflation does not rise any further and put at risk the long-term recovery of their economies.
NEGATIVE PRESS COMMENT LEADS TO NEGATIVE SENTIMENT
There is no doubt that sentiment in the UK turned negative many months ago and there is also no doubt that the ongoing negative press comment will not help the situation. Whether areas such as the North of England, which have never really participated to any great extent in the UK housing boom, will outperform the rest of the UK on a relative basis remains to be seen. This is just one of many areas of the UK where attractive rental yields are available for those willing to do their research.
High single digit rental yields or even double-digit yields will to a certain extent support the capital value of the underlying assets. While in reality this would see a potential underperformance in relative terms when the UK market does recover, relatively high yields are extremely attractive in the current low interest rate environment. Could we see a significant switch between capital appreciation and rental income investment in the UK housing market?
Source: Property Forum