Private Finance predicts house price inflation for the upper end of the property sector

Nationwide, Britain’s biggest building society, has forecast virtually no growth in property prices for this year and very little for 2011 and 2012. It says that house prices rose by 1.2% last month and are up 8.6% on an annual basis but will fall back as interest-rates start to rise and unemployment - especially in the public sector - increases next year.

However, some experts are more bullish. The Centre for Economic and Business Research (CEBR) is forecasting a 6% rise over 2010, based on the assumption that interest rates will remain low or even unchanged. It also expects that, whilst house prices might falter again in 2011, they will rise 20% by 2013.

Such conflicting reports mean that buyers and sellers are feeling somewhat confused about the future direction of house prices. However, Private Finance believes that clients can take a more confident view about the upper end of the UK housing market, where prices are continuing to rise and purchasing high quality property remains a sound investment decision.

“In the last few weeks we have seen incidents of buyers willing to increase their bids for property at the upper end of the market, sometimes by as much as 18% in a single week,” observes Simon Checkley    , managing director of independent mortgage broker, Private Finance.

“This is indicative of the active interest in this sector of the market, so it is essential that such buyers arrange their property finance before their offer is accepted, so that they can move quickly to secure their desired property.”

“Obviously, such price rises are not typical of the UK market in general, but then we should remember that there isn’t a single market for property, but a number of very different market sectors affected by specific variables.”

To assist clients in assessing house price dynamics in the UK, Private Finance suggests they consider the following 3 key factors

1. The fundamental macroeconomics of the UK property market – increasing demand from a growing UK population versus limited supply of housing stock – mean that house prices in general are likely to rise steadily in the long term. The UK was already short of new homes before house builders virtually stopped building in 2008, with no signs of a return to business as usual for several years. Perhaps the huge price inflation of the early 21^st century has passed for good, but what would be so bad about that? People could get back to seeing property as a place to live and not some ‘get rich quick’ scheme.

2. There is no such thing as ‘the UK housing market’. Just as the individual markets for art prints and original art works are entirely different, so are the markets for 2 or 3 bedroom terraced houses and 5 or 6 bedroom country houses. So, even in the short to medium term, the economic factors that affect the sale and price of much of the UK’s housing stock are completely different from the specific - and sometimes local – factors that affect market niches.

3. Finally, property is not just a ‘utility’ purchase. Maslow’s hierarchy of needs demonstrates that, having first found food and shelter, humans develop their needs for esteem and self-fulfillment. With the ‘baby boomers’ coming to the peak of their earning power, the upper end of the market will see buyers actively looking for houses that reflect their aspirations. They will be prepared to pay for a property in a certain style in a particular location and this demand, coupled with limited supply of ‘original’ homes, will ensure that prices in such sectors continue to rise.

Simon Checkley     adds “Commoditised markets are weak right now, with decreased disposable income and the fear of unemployment meaning that people feel worse off than they did two years ago. Mass market homes are unlikely to see a significant increase in prices in the next few years. But the upper end of the market experiences quite different dynamics.

“Just like beautiful and original works of art, high quality property is rare and has a unique nature which will continue to support an increase in its price over the years. We strongly believe that investment in the upper end of the UK property market continues to be a wise long-term investment decision.”

Home buyers advised to base their affordability decisions on long term swap rates

As the official UK  Bank Rate (BR) holds steady at 0.5% for the eleventh month in a row, there is much discussion about potentially significant and rapid increases in interest rates on the back of rising inflation. Of course ‘significant’ in political and economic terms means an increase of 0.5% in BR over a period of a few months and possibly 2% by the end of 2011. However, this short term view is not necessarily as significant for a long term mortgage borrower.

Ashley King, Head of Treasury at Arbuthnot Latham Private Bankers points out:

“Over the past ten years, 5 to 10 year swap rates, which drive the cost of mortgage funding over a similar period, have generally been between 3.5% and 6.5%. The average over this period is circa 4.5% to 5%, which is viewed by many economists as the ‘neutral rate’ for UK interest rates. Recent events, such as the credit crisis and the Bank Rate falling to an historical low, may not have fundamentally changed the outlook for neutral rates. It’s fair to say that the current 10 year swap rate of around 4% is at the lower end of the range, which does translate to interest rates heading back towards 5% as the UK economy recovers.

“Most lenders’ 5 and 10 year mortgage rates are presently building in a margin of around 1% to 1.5% over cost of funds. If long term rates begin to increase, these fixed mortgage interest rates could rise to well above 6% if current margins are maintained. These margins will only decrease if and when liquidity - and therefore competition - return to the market.”

Given this view, independent mortgage broker, Private Finance, is recommending to clients that they budget in accordance with these longer term indicators when calculating the maximum monthly repayments they can afford. They should not be discouraged from buying a property, just because a historically low UK Bank Rate is likely to increase in the short term. Simon Checkley, managing director of Private Finance, advises:

“If a mortgage based on these longer term rates can be afforded then we see no reason why a buyer should be put off a property purchase just because there is talk of increases in inflation and interest rates. Against the background of this long term approach, borrowers should look to benefit in the short term from some of the attractive tracker rates currently available at rates as low as 2.5%; just don't use that rate as a guide to calculating what you can afford in the long term.

“Within your long term strategy, there are always opportunities to save money against the long term average rate, so it’s important to seek the advice of an independent, whole of market broker who can advise on the best deal at all times.”

Buy to let earns 187% return on investment in 10 years and is set for a good year in 2010

Residential property has earned a higher return than cash, shares or bonds over the past 10 years, even though there have been major falls in house prices between 2007 and 2009, according to recent research.

According to the Halifax, UK house prices increased 105% in the 10 years to December 2009, while buy-to-let landlords could have made total returns of 187% on the money used as a deposit, including rental yield, assuming a 33% deduction from average gross rents to cover costs.

Martin Ellis, group economist at Halifax, said in a press statement “Property has still delivered good long-term gains despite recent turbulence.”

And in what is promising to be a much better year for landlords, rental income from prime London homes is set to increase in 2010, along with competition between lenders for buy to let business.

The first piece of good news is that buy-to-let investors saw a 7.6% annual return last year, compared to a loss of 8.8% cent in 2008, according to new industry research.

Secondly, rents in central London increased by around 2.3% in the three months to December, thought to be caused by a reduced supply of rental properties and growing demand from City employees. In the short term, rental income growth is likely to be limited by the weak economic conditions – and the time it will take for available rental stock levels to fall back to the long-term average. But the demand for rental properties will remain strong over the next few years because first-time buyers will continue to find it difficult to obtain mortgage finance.

Buy-to-let investors are likely to be assisted in 2010 by an increase in buy-to-let lending as the year progresses, experts say.

Simon Checkley, managing director of Private Finance comments, “In the past month, we have seen an increase in competition in the buy to let sector. Rental coverage and maximum LTV vary, but several lenders are offering free valuation and legal fees for remortgage business. And of course for larger investment properties many private banks will be prepared to lend to the right client. You just need to know where to look.”