Housing Market Update: What is the Outlook for Property Investors?

Rising at the fastest annual rate since 2004 in June, average house prices in the UK are now at a record high of £294,845, with larger homes remaining among the most in-demand properties on the market.

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As house prices have continued to climb even amidst the cost of living crisis, the latest Zoopla House Price Index also reports that housing demand was up 40% compared to the five year average in the four weeks to 26th June. 

Halifax’s Managing Director, Russell Galley, suggests “the supply–demand imbalance continues to be the reason house prices are rising so sharply” and that prices have been somewhat insulated from the cost of living crisis due to it “being felt most by people on lower incomes, who are typically less active in buying and selling houses. In contrast, high earners are likely to be able to use extra funds saved during the pandemic”. 

In addition, Nationwide’s Chief Economist, Robert Gardner, stated “there are tentative signs of a slowdown [...] nevertheless, the housing market has retained a surprising amount of momentum. Part of the resilience is likely to reflect the current strength of the labour market [...] the unemployment rate remains close to 50-year lows”.

With many assets reacting negatively to current market conditions – such as the lingering effects of the Coronavirus pandemic, soaring inflation and the war in Ukraine – the ongoing resilience of the UK’s residential property market will likely be a relief for property investors. 

Inflation is at a staggering four-decade high of 9.4% as of June whilst interest rates on instant-access cash savings accounts are barely scraping 2%, and the highly reactive equities market continues to be volatile and unpredictable. 

Meanwhile, both house prices and demand for housing evidently remain strong, and due to its essential nature, the residential housing market has long been known to be able to withstand periods of market turbulence better than many other assets. 

What’s more, due to a history of undersupplied demand, even as experts suggest the Coronavirus-induced housing boom is slowing, property investors are unlikely to notice any impacts on their investments, with property boasting a history of strong capital growth even before the “race for space” provided the market with a boost.


Changes to buy-to-let are eroding its appeal

Though the landscape for property investors at present is generally positive – with substantial market activity from both a rental and sales perspective – buy-to-let investors have faced a number of challenges in recent times that have had an impact on the appeal and profitability of the popular method of investment. 

Tax changes such as the elimination of mortgage interest tax relief and changes to the way in which landlords pay capital gains tax meant buy-to-let investors were already faced with rising tax bills, but now gross rental yields have also hit a record low of 4.38% nationally. 

Research consultancy Capital Economics forecast that rental yields will drop further by the end of 2022, hitting a new low of 4.26%, whilst interest rate rises increase landlords’ outgoings. 

As well as this, former Housing Secretary Michael Gove published new rules in June which see “no-fault” evictions scrapped, making it harder for landlords to repossess their rental homes. This is likely to have a substantial impact on the availability of buy-to-let mortgages, as the option to repossess – and somewhat ease of doing so – was a major factor in giving banks the confidence to lend to landlords in the 1990s. 

In fact, when Telegraph Money reached out to 12 lenders, only four stated they had no plans to alter their policies in light of the new rules.

It’s clear that it has been a turbulent few years for buy-to-let investors amidst the changes, and whilst buy-to-let does continue to have potential for long-term growth and could still prove a valuable method of property investment for those willing and able to tolerate these challenges, there is increasing appetite for alternatives


The increasing popularity of property bonds

A much more hands-off approach to property investing, investors into property bonds have not been affected by the changes faced by landlords, but still have exposure to the investor-favoured asset and are able to reap the benefits of a buoyant housing market. 

With the UK’s well-publicised gap between housing supply and demand – which has only been exacerbated by the post-Coronavirus lockdown boom – the requirement for the alternative finance provided by property bonds to support small and medium-sized housebuilders deliver much-needed housing is clear. 

And what’s more, whilst investing for impact in this way, investors can also target attractive returns often in excess of 7%. If held within an Innovative Finance ISA (IFISA), this means absolutely no income or capital gains tax is payable, an advantage now more than ever as investing in a tax-efficient manner is crucial to maximise potential returns. 

As the number of new homes under construction soared by 31% in May compared to the previous three months, the resilience of the housebuilding sector after several years of varying degrees of restrictions is evident. 

But to match current demand for housing and come close to meeting the Government’s 300,000 new homes per year by the mid-2020s target, more must be done to aid SME housebuilders in re-entering the market – leading to attractive opportunities for experienced investors to do well whilst doing good via property bonds. 


A buoyant, resilient housing market

Property has long been considered a core asset with excellent potential for growth in the UK, and the residential market in particular has proven time and again its resilience as of late.

Though some experts suggest the surge in both house price growth and demand for housing witnessed as a result of the Covid-19 pandemic are due to slow, market activity remains well-above pre-pandemic levels and was strong and promising for investors even before the housing boom took hold.