There has been a great deal of debate in recent months concerning the ongoing increases in property values and the overall stability of the UK property market. With property price hikes showing no sign of relenting, the question has been raised; is the bubble about to burst?
Bridgebank Capital’s managing director, Laurence Goodman, has attended numerous property conferences and forums in recent months in order to maintain an informed position and understanding of the UK residential property market, and in particular the differing economic drivers between the London market and the rest of the UK.
At a recent UK Property Professionals Residential Forum held in Manchester, Laurence was on the forum’s Q&A panel alongside, amongst others; Simon MacKay, Residential Housing Director for Jones Lang LaSalle and Paul Beardmore, Director of Housing at Manchester City Council. In this arena, the panel members all came to a general consensus that when considering the property market, London’s housing sector must be treated as a separate economic entity to the rest of the UK, but more importantly UK property price rises were being driven by the simple economics of supply and demand, and that supply needed to increase significantly just to keep up with quantifiable demand; hence overall, no prediction of a bubble was expected.
This opinion is generally shared by most economic pundits, who deem it unlikely that a residential property bubble will occur in London. There is an insatiable demand for both owner occupied and investment property in this area, and house prices will continue to increase, as long as London maintains its favoured position.
However, in an attempt to cool down price growth, particularly in London, the Bank of England have announced that as of 1st October 2014, residential mortgage lenders can have no more than 15% of its new mortgage lending based on a Loan to Income ratio of more than 4.5x. In reality however, as about 30% of residential property transactions in London are cash purchases this strategy is not expected to have a material impact on cooling down valuation increases, and likewise elsewhere, the average LTI multiplier is 3.22x.
Based upon current demand for property outside of London, and distinct lack of new build property supply, prices are expected to continue increasing, with the RICS predicting increases of an average of 5% per year for the next five years.
As a result, the private rented sector is also experiencing continued significant growth, which is also driving up property values.
Overall, it is clear that whilst the property market has recovered significantly since 2008, particularly in London, we are unlikely to experience a housing bubble in the UK. We do however have a distinct requirement for development commitment and investment to take place outside of the capital.
Steve Woods is head of sales at Bridgebank Capital