Osprey Property Market View 4Q2018
- Concentrating on the UK economy, GDP is expected to grow by 1.3% for 2018, if this forecast is realised it will be the weakest economic growth since 2009. This is off the back of a more conservative outlook for consumer spending, business investment and trade. Granted real wages are now rising, but so far the increases have been negligible and will not translate into any growth in consumer spending. In addition productivity remains weak, which will also limit increases in real wages.
- Rising costs for businesses (apprenticeship levy, business rates, living wage), coupled with the weak exchange rate, may still impact the domestic economy further. Inflation is up a small amount, c2.3%, and wage growth is a smidgen ahead at 3.1%; this may support consumer spending.
- The official bank rate was increased by 0.25% to 0.75% in August. The rate remains very low by historic standards. Any additional rise in interest rate that may occur will likely be introduced slowly and steadily to eliminate economic shock.
- National House Prices: According to the Nationwide House Price Index, UK property prices grew 2.3% in the year to Q2 2018. On a regional basis the best performers have been: East Midlands (4.5%), West Midlands (4.3%) and Wales (4.1%). London continued to have the weakest growth and is the only region to have experienced negative growth.
- Global; Both globally and domestically the economy and political environments remain volatile
- UK and Brexit; the route Britain takes will have large implications for the future strength of the UK economy. The fundamentals of the UK economy may remain broadly positive, but sentiment remains very fickle.
Prices in some cities over the past 10 years have gone up 50%+ eg. Oxford and Cambridge, whilst in other cities performance has been flat or even lower than 10 years ago eg. Newcastle. Within certain cities some areas have gone up and some areas have gone down and indeed on a more micro-level some streets are up, whilst others are down. National house price forecasts are all very well but each house has its own microcosm of it’s neighbourhood, it’s area, it’s city, it’s region and it’s country.
Generally though, our forecasts over the past 5-10 years have been pretty good and accurate, albeit not overly exciting but the property market has not been exciting. It has been safe, stable, solid and reliable; just what was needed. The lettings market has been strong and generally driven rents up.
However, we do feel for the first time in 10 years that there are real headwinds to the UK residential market;
- Brexit: of course, this has to be first in the “headwinds” category
- Buy to Let rules: tax and regulatory changes have hit profits
- Stamp duty; increases and the 3% surcharge for second homes have had a definite impact
- Mortgages; the loss of tax relief on mortgage interest
Property turnover; is down across the country and especially in London
- International buyers; are less active due to Brexit and changes in non dom rules
- Interest rates; unlikely to rise aggressively but there is always a but, always an unknown
- President Trump; he seems serious about trade war, serious about confronting Iran, serious about intimidating the US Federal Reserve; is this a global risk, possibly.
- Labour Party; a real threat that if there was a snap election, and the Labour party were to govern, that rent controls would return
In a nutshell it is a slightly toxic mix of negatives!
So for the first time in a decade, we feel that now is NOT the right time to purchase residential investment property.
The risks outweigh the rewards.
We change our forecast from effectively a “buy” rating to a “hold or sell” rating; depending on your own personal aims and objectives.
Do we believe in the long term story of residential investment; yes, absolutely. But do we feel we might be in for a period of negative returns short term; yes.
What quantum might this be; very difficult to tell but a scenario of -5% to -10% over the next 12 months is possible.
The good news is weakness will bring opportunities. We don’t think there will be distress, but a lack of other buyers might present opportunities to the canny and well advised investors, and Osprey Property are able to advise on where we think and see these opportunities are.
So if you are thinking of selling in the next year, please get in touch with us; it might be better sooner than later.
Whilst if you are thinking of buying, then be sure to get in touch; there will undoubtedly be good buying opportunities.
And lastly, if you are a long term investor, then ride out the market, your unit will likely still rent well, and your income will come in and over the next 5-10 years the investment should do just fine.