While the vast majority of UK investors remain in a cautious and recessionary mindset, financial data is showing early signs of growth and recovery.The economy is healing and while property is set to deliver great returns, investors may be surprised which areas will perform best.
As The Bank of England governor recently stated, since 2010 more new jobs have been created in the private sector than over any other two-year period since the mid-1990s. The majority of new jobs and hours worked have increased outside of London, while total income across the country is again reaching new all-time highs each month.
The Great Recession gave employers every excuse they needed to reduce headcount from 2008-2010, meaning workforces are incredibly lean and ready to expand. The credit crunch forced indebted businesses to improve or fold, forced individuals to reduce their debts and increase savings. This has left the UK with healthier finances and more money available for business investment and retail spending.
It’s conditions like these that led to recovery from previous downturns and just like 1993, 1975 & 1955, the boom-bust-boom cycle will slowly assert itself again, with rising confidence and rising property prices
Retail sales are booming, industrial production is on a rising trend, manufacturing figures are increasing, mortgage lending is more frequent and repossessions are falling. So why then, is it still common perception that house prices outside of London are a disaster? It’s cool dinner party chatter that describes London as a safe bet, but there’s a 10-20% fall in regional house prices waiting in the wings.
For those willing to look past the headlines statistics show that: statistics show that:
Mortgage payments in the North stand at 26% of mean take-home income, the lowest and most affordable figure in over 10 years. This compares to 49% in London, meaning that even when fully adjusting for its higher average income, London property has already jumped to a level which is radically less affordable than property in the Midlands and North.
The house price to earnings ratio for first time buyers in the North is now 3.2 x average earnings, the lowest it’s been since early 2003. This compares to a whopping 6.2 x average earnings in London.
Rental yields are 30-50% higher in the Midlands and North than they are in London, meaning investors are earning far greater income when investing here.
Despite London’s boom since 2009, inflation adjusted house prices for the UK as a whole are now below their 40-year trend. This means that non-London house prices are already significantly below their long run average values, providing tremendous value for new buyers.
In short, investing in regional property may not sound as trendy or glamorous, but house prices in the Midlands and North aren’t about to collapse. In fact, these areas are already such good value relative to local earnings that they’re almost certain to outperform those in London over the coming years.
Supporting this idea is a research piece by London based property specialist Hamptons International, who recently reported; Regional values have fallen to a point where homes are becoming attractive to buyers again.
“There’s been four years of negative movement in the North and the Midlands; now there’s really good value out there,” Adam Challis, head of research for Hamptons, said in an interview. “The yawning gap between London and the rest of the country will moderate.”
With this in mind, the question remains that with this initial phase of stubbornly slow economic recovery grinding along, where will price rises come from? In addition to already being tremendous value, there’s 5 years’ worth of pent-up demand from buyers completely frozen out by high deposit requirements since 2007. There are hundreds of thousands of potential buyers who cannot wait to buy a home when the mortgage market begins to thaw. Hundreds of thousands of reluctant rental tenants saving up deposits, grown adults forced to move back in with Mum & Dad to save up a deposit, even separated couples who still live together as they save up to move on. There is enormous pent-up demand from prospective buyers who will act as soon as deposit requirements inch down.
On the topic of mortgages, Buy to Let lending is already up 18% year on year, perhaps an early sign of increasing confidence from both investors and lenders? With total income making new all-time highs, stable property prices and renewed Government support, conditions are ripe for lenders to begin relaxing their criteria and begin competing again for new mortgage business. This will provide a much needed thaw in lending practices and will allow the property market to regain some early momentum in 2013.
While London and its surrounding areas have seen an enormous influx of wealth from abroad, the rest of the UK relies more on mortgage availability to help encourage growth, which explains why London is always the first to turn higher after a recession, before other towns and cities gradually follow suit and play catch-up. This same effect is happening again today.
With regards to the performance of the housing market, house price corrections in the last three major UK downturns all lasted 4 years. From 1952-1956, from 1971-1975 and most recently from 1989-1993. History tells us that 4 years is the length of time it takes for the UK housing market to heal after a bubble bursts, and so far, this time around, history is once again repeating. As Sir Winston Churchill wisely remarked ‘The further backward you look, the further forward you shall see.’
Economic growth won’t re-start with a bang, it will tiptoe up on us while we’re busy worrying about Europe, energy prices and all number of other concerns. Bull markets traditionally begin in difficult times, climbing a ‘wall of worry’ that is overpowered by fundamental value and resilient economic strength. It’s human nature, and this time around will be no different.
Regional property markets in this country will never be materially cheaper than they are now, and 2012 will mark the slow beginning of a long and powerful new bull market. Buy to Let investors now have an incredible opportunity to prosper from the UK’s imminent revival.