UK Buy-to-Let: A Look Back at the Market in 2014

23rd December 2014

In 2014 Britain saw the highest annual increase of house prices amongst EU member states. In fact, data by the he Organisation for Economic Co-operation and Development (OECD) revealed that the UK was in fact one of the OECD nations with the biggest rise in real house prices, with a 90%+ growth from the 1980s until the beginning of the financial crisis in 2009. Since then the British property market has flourished once more.

Today, 18% of British households rent from private landlords instead of owning their family home. This proportion is set to increase over the next couple of years, to every third household renting privately as investors continue to appreciate the property market, with the potential of the buy-to-let market being a steady source of income and profit.

Since its emergence in 1996, the buy-to-let market, once known as the domain of professional landlords alone, has changed dramatically. Growing inflation rates, smaller pension returns, reduced saving rates and prevalent uncertainty in the current stock market has resulted in homeowners now seeing their home as more than just a place in which to live; they now consider it a major safety asset.

According to the Office for National Statistics (ONS), house prices outside of the capital grew by 9.1% in the 12 months leading up to September 2014. The total UK average has increased by 12.1%, almost 4% more than in 2013. Whilst London evidently contributed to this surge in property prices, property investment experts Knight Frank note that the capital is gradually reaching a plateau, as its property market becomes increasingly static. In fact, the property values in prime central London dropped by 0.2% in November 2014.

In September 2014, investors in England and Wales typically received yields of approximately 4.9%. The increase of house prices and decline of void periods led to annual returns of an average UK rental property being as high as 13.4%. However one area in particular stood out in the British property market: the North West.

It was reported that within the first three quarters of 2014, a grand total of £2.1billion had been invested into the North Western commercial property market alone, making it the busiest market outside London. A Mintel report concerning the buy-to-let market explained that whilst serious affordability constraints prevail, the demand for rented accommodation in the UK continues to grow. This is not only because of the rising number of foreign nationals entering the country, but also due to an ever-growing student population. Resultantly, the student accommodation market has prospered enormously and is now estimated to be worth between £2.5 and £3billion, thus enabling it to become the UK's third mainstream asset class.

The mood amongst British landlords continues to be very positive and optimistic, with over half considering extending their property portfolio in 2015, due to rising rental demand and ever-growing rental prices. Whilst property experts from Savills, Knight Frank and Halifax predict further increase in house prices, they moreover expect this upsurge to be between 2-3% in 2015, relatively smaller than the growth in 2014. According to Savills the capital's property market will come to a rather abrupt end of outperforming the rest of the UK for almost an entire decade, with its growth, even in prime locations, dropping as low as 3%, almost a quarter of its 11.4% growth in 2014.

Halifax's housing economist, Martin Ellis, noted that a moderation in house price growth was very likely in 2015 as "supply and demand become increasingly better balanced". In other words, after getting ahead of itself in 2014, the UK property market will not stabilise itself in 2015. Nevertheless this is not to say that the property market is expected to crash; the opposite is the case. Whilst the estimated growth varies amongst sources, experts, such as senior economists at Oxford and residential researchers at Savills, have come to the agreement that the market is merely preparing itself for another massive boost from 2016 to 2019, with an expected increase of 18.2% in property prices.

Several reasons lie behind why the UK property market will experience a slower growth next year. First of all the British housing market is to a large extent undersupplied, not meeting the growing demand for affordable and quality rental housing. Secondly, the fragility of the Eurozone, disputes with Russia, and the slow growth of vital emerging markets such as China are anticipated to slow the UK economy growth down by 0.6% to 2.4% in 2015.

As the British economy strengthens policymakers, particularly the central bank, are increasingly considering raising interest rates, thus directly affecting house price growth, as lending becomes more expensive. Moreover, the new property tax system, as proposed in the Autumn Statement 2014, is set to benefit 98% of homebuyers, thus boosting the lower end of the market. On the other hand, the new Stamp Duty system will have large consequences on the other end of the market spectrum, as it will raise the rates for individuals purchasing homes worth over £937,000.

With the general election in 2015, the housing market is increasingly becoming a focal point of political debates, with each party having a slightly different view on how to improve the current situation. This does mean however that many investors, particularly from abroad, are waiting for the actual outcome of the elections before investing into British property, perhaps leading to a slightly slower start of the New Year especially in the London and general South East areas.

Source - Knight Knox International