Is the UK property market disconnected from average earnings?

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When you consider that the average home in England now costs in excess of £300,000 (as of November 2015 in an ONS report) and London is even higher at £537,000, have UK property prices lost their long-term connection with average earnings? Over the last decade the average property price in England has increased by 50% with London showing an increase of over 90%. When you compare this with average weekly earnings increases of 23% and 19% respectively what is happening to the UK property market?

We are starting to see the emergence of a number of reports suggesting that property prices are being stretched to the maximum of the traditional UK affordability factor. The reality is that the historic connection between average earnings and property prices was lost some time ago. There are a number of contradictory factors come into play some of which will feed UK property price increases while others will hold back future growth.

Lack of new housing

Time and time again the lack of new housing across the UK is discussed by politicians who promise to alleviate the acute shortage. Time and time again, once these politicians get into office, very little is done and the situation seems to worsen. This ongoing demand for UK property, and a smaller pool of properties for sale, is squeezing prices to levels which are in many areas of the country unaffordable going forward. It would take a dramatic increase in the number of new builds to have any material impact upon the property market in the short to medium term although there is potential to impact the long-term growth.

Tax changes

As you might expect with the UK government struggling to balance budgets, a number of new taxes have been introduced to take advantage of “buoyant markets”. The main target has been the UK property market with politicians using public opinion to “tax the rich”. The reality is that property is now seen by many people as the new pension of the future. So, while headlines may suggest that changes to the buy to let market and property investment taxes are hitting the rich, this is not necessarily the case.

Troubled economy

Even though the UK economy has performed admirably over the last decade or so, outperforming the vast majority of its European counterparts, there could be some headwinds in the short to medium term. We are seeing issues emerging in worldwide stock markets, many investors getting twitchy about worldwide economic growth and a feeling that some investors are looking for an excuse to bank profits. Therefore, it would come as no surprise to see economic growth slow, demand for property reduce and prices begin to fall back in real terms.

Conclusion

While there are a number of reasons why the UK property market will likely move ahead in the longer term there are some short-term headwinds which could hold back growth over the next few years. Capital Economics, a renowned UK economic research firm, believes that UK house price growth will fall to around 2% per annum in 2016 and 2017. If we do see signs of a slowdown in house price growth this may prompt some investors to bank profits and potentially exacerbate the downturn?

Recently such downturns have played into the hands of long-term investors who still believe there is incredible value going forward in the UK real estate sector.

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