The UK property market continues to go from strength to strength despite repeated attempts by “experts” to talk it down. Despite experts predicting that the current rate of growth in the UK economy will slow in 2016 it seems that property is still very much in demand. However, this constant rise in UK property prices cannot go on forever so what headwinds could impact the UK property market in the short to medium term?
UK economy
The UK economy is starting to show signs of slowdown with growth falling from 0.7% in the second quarter of 2015 to 0.5% to the three months ended September. While this is pretty much in line with expectations, and annual growth of 2.5% for the whole of 2015, some experts believe UK economic growth will dip below 2% in 2016. As ever, the general state of the UK economy will have a major impact upon property prices but at this moment in time the UK is seen as one of the more robust economies in the world. Indeed, if we look at Europe as a whole the UK has performed admirably in recent times while the Euro crisis continues.
There is a chance that the UK economy could be impacted by a slowdown in China, which would affect the US economy prompting a knock-on effect on the worldwide economy. This could also impact overseas investment by Chinese investors although at this moment in time the impact has been more on investor confidence as opposed to actually impacting the worldwide economy today.
New mortgage regulations
A recent report suggested that the average London home is now worth in excess of £500,000 which when you bear in mind the average UK wage is just over £26,000 per annum does not quite stack up. However, in some ways we are comparing apples and pears because London property prices bear no resemblance to the rest of the UK and those working in London would expect to earn significantly more than the UK average.
The need for greater deposits and the so-called “affordability test”, required before a mortgage can be agreed, could have an impact upon property markets in the medium term. If property prices continue to move ahead and wages are not able to keep pace then the affordability factor will become a greater issue over time. In reality short-term financial assistance from the UK government will help some people, although perhaps not as many as the government might have you believe, but this cannot go on forever. On the flipside, we may see property investors looking out with London which could assist regional property markets in the UK.
The European in/out referendum
As we saw with the Scottish independence referendum, a situation which could be repeated in the medium term, any uncertainty over a prolonged period of time does impact investment valuations. In the run-up to the Scottish referendum investors in Scottish property held back until they were sure of the situation and this is a potential problem with David Cameron’s European in/out referendum expected by 2017. Indeed, rival parties are already fighting for media coverage and the greater the uncertainty in the minds of investors, the more chance that the risk/reward ratio of investing in UK property will change.
The bottom line is that if investors are able to see a specific situation in the short, medium and long-term then they can value assets accordingly. Any uncertainty, brought about by situations which could go either way, means that it is nigh on impossible to statistically calculate potential risk/reward ratios going forward, therefore many investors will tend to look at a worst case scenario.