The economy is fragile right now, and no aspect of it more so than the UK housing market. Productivity is back at pre crisis levels, sterling has been hammered by Brexit, the use of consumer credit has risen by 10 percent year on year, and for the first time in more than forty years disposable income has fallen for three consecutive quarters. And when it comes to politics…well most people are left scratching their heads wondering what’s going to happen next. It doesn’t help that conservative government A (Cameron, Osborne and co) and conservative government B (May, Hammond and co) have twice thrown us into the polling station washing machine and put us on a fast spin—first a referendum that gave us Brexit, followed by a snap general election that delivered a hung parliament. What next: a referendum to decide if we should have any more referendums; a snap-snap election? Never say never.
Meanwhile, on the other side of the Atlantic, there’s Trump pounding his fists on the presidential table making populist promises about everything from immigration bans and crazy wall building to the repeal of Obamacare, all while North Korea sticks its fingers up at the West (and just about every other country) by testing it’s notorious missiles.
Then there’s war—and proxy war—in Syria, Qatar’s ostracisation by its neighbours in the Middle East, Big Government at loggerheads with Big Tech back in the West—and all of this is just for starters. Welcome to the fast emerging ramifications of globalisation folks. To say there’s plenty of uncertainty about right now would be to state the obvious. So what on earth can property investors make of the situation?
Buy-to-let landlords throw in the towel
Getting back to the UK economy, and in particular the housing market, the group coming off worst of all appears to be those woebegone buy-to-let landlords who, right up until 2015, to quote MacMillan, had never had it so good. Over the last couple of years, however, they’ve stood by watching as their gravy train runs out of fuel and steam. Many are getting ready to jump off. Many have already jumped, abandoning the sector as an investment option altogether.
Even before Brexit, Trump and the rest of the global turmoil, buy-to-let landlords could feel the noose around their necks tightening as monetary policy turned against them, stripping them of everything from tax relief on wear and tear, to the right to truly consider their investments as a legitimate business—after all, how many businesses are subject to being taxed on turnover, not profit? And then, upon the horizon, looms the growing spectre of an interest rate rise. In June this year, three of the eight voters on the monetary policy committee (MPC) turned hawkish, hinting at a changing mood on Threadneedle Street for the first time since Mervyn King announced a decade ago that rates would be increased to 5.75%. By comparison, a rise in interest rates now from 0.25% to 0.5% seems laughable, until one realises how accustomed we’ve become to these low rates, and how damaging to personal finances every quarter point rate rise could be for over-leveraged home owners. For buy-to-let landlords, who due to gearing are often the most exposed, it’s another problem to add to a growing list of anxieties, and another reason to get out before things potentially get any worse.
Why is an interest rate rise on the cards? Partly, there’s increased appetite for it because of the Federal Reserve bank of America raising rates twice so far this year with a further rate rise expected, but also partly because of jitters brought about by an overshoot of the Bank of England’s target inflation figure of 2%. Soft figures elsewhere in the economy combined with sluggish wage growth, however, have meant that most of the MPC, including Governor Mark Carney, remain cautious.
Property market slip or dip?
Meanwhile, the property market is beginning to pull back from its heady highs, and there is much dispute as to whether this is the start of a correction, or just a temporary pause. Speaking to FTAdviser, Professor Paul Cheshire of the London School of Economics, said, ‘the current house price ratio is unaffordable. Wages are failing to keep up with inflation and the housing market is overheated,’ which is more suggestive of a substantial correction up ahead than a mild decline.
Cheap credit, grand political gestures such as Help to Buy, and the ongoing rhetoric that has convinced most people that house prices can’t ever go down are typical factors that presage a downturn. But the truth is, house prices simply cannot rise forever without being artificially supported in some way. And in the end, artificial supports always buckle under the weight of genuine market pressures—inflation, wage rise stagnation, decreasing disposable incomes, and Brexit. For buy-to-let investors there’s one more thing that should be added to this list of economic headaches, one that that trumps them all—political engineering of the property market. Now that policy is eating landlords’ profits for breakfast, the big question many are asking themselves is: where to next? For some, there has been a glimmering light of hope, in the guise of buy-to-let holiday homes.
Part 2 will be published next month.
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