The indications have been there some time, the UK property market is very much back in vogue and investors seem to be happy pushing prices higher and higher in the short term. The Royal Institute of Chartered Surveyors has today released its adjusted house price balance index which jumped to +36 in July from previous readings of +21 in June and +5 in May. This jump in confidence in the UK property sector is the sharpest increase since 2006 which was just two years prior to the US led property market collapse.
In isolation these figures could be discounted as a short-term spike but just last week we saw the Halifax house price inflation number jump to 4.6% in the three months to July 2013. Slowly but surely it is becoming clear that UK property prices are pushing ahead stronger than many experts and the government had expected and hoped for. However, the UK economy is still in its relatively early stages of recovery so what is pushing the sector higher?
Government financial incentives
Stage one of the UK government’s Help To Buy program has led to the purchase of 10,000 new homes since April and with stage two of the programme set to begin in January 2014 there could well be further impetus for the sector. When the government introduced these particular programs there were concerns that the property sector in the UK was under pressure and would struggle as the slow economic recovery began.
In many ways these fears have been overdone and in hindsight the UK government may well have preferred to hold off if it was aware of the forthcoming strength in investor demand. Unfortunately, the UK government is unlikely to do any U-turns in the short to medium term therefore we could see a wave of further financial support push UK property prices higher.
Lack of UK housing stock
If you look back over the last couple of years you will see there has been relatively little in the way of housing stock for sale in the UK which has exaggerated upward pressure. It may well be that we will see more housing stock for sale in the short to medium term, as prices continue to rise, but there are signs of growing momentum in the sector and investors seem happy with UK property prices at the moment.
Quote from PropertyForum.com : “The UK economic performance over the last five years or so has been challenging to say the least with a near double-dip recession, massive austerity measures and national debt continuing to rise by over £100 billion a year.”
If we were to see a deluge of additional UK housing stock for sale, and maybe UK banks will help with this particular angle having been left with unwanted properties over the last few years, this may offer some respite but there is no guarantee this will occur.
Safe haven status
For some time now the UK, especially the London property market, has been seen as something of a safe haven for investors in troubled times. The UK has access to European markets without being tied to the disastrous Euro and this would seem to be a plus point for many international investors looking for property assets. However, when you take into account overseas interest in UK property as well as growing domestic interest this two-pronged attack on the sector may be pushing us towards an “overheated” phase of growth.
You also have to wonder, as and when the worldwide economy recovers, whether such safe haven investors will cash in their UK property chips and look elsewhere?
Has the Bank of England poured more fuel on the fire?
Last week Mark Carney, the new governor of the Bank of England, confirmed that UK base rates are unlikely to increase before the next UK election which is scheduled for 2015. This was given as a sign to the markets that relatively cheap finance will be available to fund the ongoing economic recovery but inadvertently it seems to have poured more fuel on the fire which is the ever increasing rise in UK property prices. Has the Bank of England made a mistake?
While there was a proviso that UK base rates were unlikely to move higher unless we saw an increase in the rate of inflation, relatively cheap finance seems to be attracting more buyers to the UK property sector. It would be difficult for the Bank of England to give a conflicting indicator of future policy in light of this move as this would cause confusion in investment markets and also dent the reputation of the UK central bank.
If the UK economy was pushing ahead at a much higher rate then you could call the ongoing increase in property prices “the perfect storm” with relatively cheap finance, interest from investors around the world, government finance available and relatively little stock on offer. However, at this moment in time the rate of economic growth in the UK does not seem to correspond to the traditional housing booms of years gone by and it is difficult to see any significant recovery in the UK economy in the short to medium term.
Many investors seem to be forgetting we have yet more austerity measures to follow, UK national debt is still growing and first-time buyers are becoming somewhat detached from the UK property sector. Far from the perfect storm!