In reality the UK property market has been a dream for many investors looking on a long-term basis – especially the London market which continues to power ahead. Even though the vast majority of property market price increases in the UK are centred round London and the south-east there has been some improvement in other areas of the UK. However, the affordability factor is now coming into play.
Why is affordability a problem?
The simple fact is that since the 2008/9 worldwide recession that has been no real increase in wages and household income. This simply means that any income rises have been less than the rate of inflation which effectively means a reduction in spending power. As spending power is not expected to increase in real terms until 2016, and the UK property market has pushed ahead over the last few years, it will take some time for domestic investors to “catch up”.
This has created yet another issue because corporate investors are looking to use the low interest rate environment in the UK and around the world as a means of leveraging their assets. As a consequence, with corporate investors looking longer term they are taking advantage of low interest rates to acquire properties in countries with relatively stable property markets. Even though domestic demand is drying up in the UK the demand from corporate investors is still supporting prices and in some cases they continue to tick higher.
UK interest rates
The other possible issue on the horizon is the fact that UK interest rates will rise in the medium-term, with a short-term increase effectively discounted by the Bank of England, which will impact affordability for domestic and corporate investors. The Bank of England will need to be very careful with regards to UK base rates because if they move them higher too quickly they could kill off any potential economic recovery. On the other hand, if they leave it too late then cheap finance will encourage debt which will at some point have to be repaid and impact on medium to short-term spending.
The UK property market has been one of the best performers since the 2008/9 worldwide economic downturn brought about by the US mortgage crisis. There has been talk of an “affordability ceiling” on numerous occasions although in reality it does seem as though these concerns today are more relevant than ever. Household income across the UK is not expected to increase in real terms until 2016 which will mean no reduction in the affordability factor for the foreseeable future. Whether corporate investors will take up the slack in the UK property market remains to be seen but it has to be said that record low UK base rates are very attractive to those investors looking at acquiring assets on a long-term basis.
It will be interesting to see how this particular situation pans out in the short to medium term and how quickly the next UK government can make a positive impact upon real term household incomes.