While previous estimates of a 3% increase in UK property prices seemed optimistic at the time it looks as though the actual figure will be around 6%. Even in “normal economic times” this would be an acceptable performance but when you bear in mind the ongoing economic and political turmoil around the world, why is the UK property market so strong?
The Royal Institute of Chartered Surveyors (RICS) is the body which estimates UK property prices will have increased by 6% during the whole of 2015. It is also worth noting that despite the economic turmoil mortgage applications are at an 18 month high which is creating significant demand within the UK property sector. This demand continues to squeeze prices higher and higher and when you take into account growth in the buy to let market, perhaps the UK property market has further to go?
Are we in a false market?
Time and time again experts have tried to talk down the UK property market with very limited success. Many of these observers have also called this a “false market” which is driven purely and simply by a lack of affordable property and growing demand. The reality is that a so-called false market can only prevail in the short term which is at odds with the long-term upward trend in UK property prices. So, while the UK market seems to be at odds with the worldwide economy it is difficult to see any significant downside in the immediate future.
A 15% increase in mortgage lending during August seems to further strengthen the argument that there is significant underlying demand for UK property.
What can stop this rampant growth?
Despite the fact that wage inflation has returned to the UK it is still nowhere near house price inflation at this moment in time. As a consequence, already stretched valuation to income ratios could widen further in the short term but eventually this factor will at least hold back future acceleration in property price growth. When this will occur is anybody’s guess as valuation to income ratios have been stretched for some time.
We also keep mentioning the inevitable increase in UK base rates which will hit many people in the short to medium term. Any increase in mortgage rates will place more financial pressure on those who have perhaps overstretched their finances to claim that dream property. Ultimately this could lead to more property stock becoming available thereby reducing the current squeeze in property prices.
Average rental charges
Rental inflation in London alone came in at 25% when comparing figures from 2011 and 2015. Those who are unable to afford their own property are now looking at the buy to let market and it looks as though rental charges will become a more significant element of their monthly expenses. However, even though rental charges have become somewhat stretched, when taking into account average household income and wage inflation, there is still growing demand.
As a consequence, unless we were to see yet another economic collapse on a global basis it is difficult to see any reason why UK property prices will fall dramatically in the foreseeable.