Richard Purcell examines the most effective ways to manage your money. Helping you create, or simply maintain, your own luxury lifestyle. This issue he looks at the prospects for the UK property market.
Bricks and mortar is like no other investment. You can benefit from both income and capital growth. You can touch and feel it, which can give greater peace of mind compared to other investments. You can even live in it. Perhaps it’s all these reasons that has attracted me to invest in property. Over the last 5 years I have been investing in properties with the aim of building up a stable income. But just how good is property as an investment? What opportunities are there in the market, and what do you need to think about before taking the leap?
First, it’s worth taking a look at how property has performed recently. Over the past 5 years average house prices have increased 32% in the UK. It’s no surprise then that property has been a key driver of wealth creation over the last few years. According to the Sunday Times Rich List, residential and commercial property is the main source of wealth for 26 of the 100 richest people in the UK, much more than any other source.
They always say that the past is no guide to the future, and there are certainly lots of reasons why property may not provide such a good investment in the future. In the UK, the political landscape, and especially Brexit, means that the UK’s position as a global property hotspot is under threat. Short-term the pound is weaker, which has made the prime London market more attractive to international investors. But long term, the jury is out, and it will depend on what sort of deal the UK strikes with the EU. Either way, the longer the negotiations, the greater the uncertainty and the bigger dent it will make to the market.
Other key drivers like low interest rates and high employment levels have helped support property prices in recent times. However, with interest rates beginning to rise, this will make mortgages more expensive. The impact of Brexit on jobs could also see employment levels begin to fall in the next few years. On the flip side though, the continued lack of house building in the UK means there is simply not enough housing supply to meet demand, even if you take into account the likely impacts of Brexit. Overall, the best guess is that the property market is likely to see fairly modest price increases over the next few years. Knight Frank expect average UK property prices to increase 14% over the next 5 years, so about half that of the previous 5 years. There are likely to be regional variations though – with the North West expected to see bigger increases, and London much smaller. In fact there could actually be further falls in London property prices over the next year or two. Rental growth is expected to be slightly more positive though, with rents expected to keep pace with wage growth.
Although the outlook for property returns is not as good as the recent past, if you are investing over the long term and have a balanced approach looking for income as well as capital growth, then it can still offer good potential. Direct investment into property has some practical drawbacks though. For example, property can be slow to sell and is not suitable if you need access to money at short notice. There is ongoing maintenance, voids in rent, and a less attractive tax treatment to consider too. So it’s important to go into property investments with your eyes wide open, and perhaps even think about seeking advice to make sure it’s the right investment for you.
Richard Purcell is a property investor and financial product expert.
Next up: strategies for investing in property