While the European Union referendum has encouraged a ferocious fight between those for and against membership of the EU, it has also put the UK property market at the forefront of many discussions. While we can discount some of the more blatant attempts to scare voters one way or the other there are some concerns that UK property price growth is becoming even more detached from average household incomes. So, is there really a risk of the UK property market crashing?
Property price performance
While it is dangerous to pick and choose local property markets across the UK the fact that house prices in the U.K.’s top 20 cities rose by over 10% in the year to April is a concern. Average household incomes are struggling to maintain positive momentum after a period of real pressure since the 2008 worldwide economic collapse. When you also bear in mind relatively low interest rates and inflation, the ongoing increase in UK property prices is alarming.
There were hopes that as some of the more popular UK markets hit levels were which were unsustainable investors would begin to look towards other areas. So far, and London is a prime example of this, investors seem to be focusing on a relatively small number of large cities across the UK and unwilling to even consider some of the less trendy markets which perhaps offer better long-term value.
There are reports that the current UK house price to income ratio stands at 6.1 times earnings which is well above the affordability level for the majority of the UK population. Indeed if we look back to the 2008 crash, which was a surprise to many people, the ratio was 6.4 times just prior to the collapse in the worldwide property market. There are now serious concerns that some areas of the UK are being pushed to unsustainable levels simply because of the relatively low cost of finance which is likely to continue for some time to come.
The problem is that when UK base rates finally move towards their long-term average this will place enormous pressure upon those who have financed their property purchases at low interest rates. It may be some time before we see this situation emerge in the UK but once investment markets have an inclination that UK base rates will rise we will see investors re-evaluate their positions. Would this lead to a sell-off in the UK property market?
Ignore Brexit and look at the fundamentals
At this moment in time nobody has any idea how UK property prices would perform if the Brexit vote was successful in the forthcoming referendum. To that end, nobody really has any idea how UK property prices would perform if we remained in the European Union. At this moment in time it looks as though the Remain campaign will be victorious but this is by no means set in stone.
Until we are aware of the result of the forthcoming referendum perhaps investors should focus more on the long-term fundamentals and the inevitable increase in base rates in the medium to longer term?