The finance director of Grosvenor Group, the company which manages the property assets of the Duke of Westminster, has issued a warning about the UK property market. He believes that the balance of probability has now tipped in favour of a correction in the short term. This is not the first property expert to predict a fall in UK property prices but his detailed analysis of the situation certainly gives food for thought.
So, why does one of the most influential and well-informed property investors believe that the UK market is ripe for a correction?
Cheap finance fuelled demand
Nicholas Scarles, the finance director at Grosvenor Group, has cited a number of factors for creating the recent boom in UK property. These include low interest rates, cheap sterling after the financial crisis, a shortage of suitable properties, strong demand and the “safe haven” tag attributed to the UK. These are all factors which have been discussed on numerous occasions but when you look at them together you can see why UK property has benefited.
Critics will suggest that cheap finance will be around for some time to come, with the Bank of England unlikely to increase base rates in the short to medium term, but there is more to consider.
Over the last couple of years we have seen commodity prices falling, overseas investors holding back on investment in the UK, the ongoing demise of the Chinese economy not to mention tax rises and political uncertainty. At the end of the day, as markets in the UK continue moving towards overbought situations, many property investors were looking for reasons to reduce their exposure. We have listed a handful of reasons above and many have taken this as a prompt to bank profits and sit on the sidelines to see how situations such as UK membership of the European Union pan out.
It is also worth noting that average UK property prices increased by 50% between 2005 and 2015 and a staggering 90% in London over the same period. When you compare this with average weekly earnings increases of 23% in England and just 19% in London over the same period then the situation does begin to look very different. There is no doubt that house prices have run way ahead of affordability which is the main reason why first-time buyers are struggling to climb onto the property ladder.
Property market correction
It is worth taking note that Grosvenor Group issued a similar warning back in 2014 and had the courage of its own convictions to begin reducing its worldwide exposure to property markets. The group is likely to reduce its UK exposure further in light of this statement from the finance director but it will be a gradual reduction. While the term “correction” would for many people indicate a sharp reduction in property prices this will not necessarily be the case.
The group believes that the initial stages of a correction in property prices will be in real terms as opposed to actual terms. This basically means that property prices will rise less than inflation and therefore lose value in real terms. Whether the latter stages will see more volatility and actual property price reductions remains to be seen. There are few property experts willing to discuss their strategies in the open and have the courage of their convictions at the same time. Do not discount the views of Grosvenor Group which has a history few other property investment companies can compete with.