Data Talks: The UK housing market
Welcome to Data Talks. Our aim is to provide an informative weekly view on developments and trends within the UK residential property market. In this first issue, we take a look at property as an asset class and also consider the regional market in comparison to Greater London. We welcome any feedback, so reach out to the data team at firstname.lastname@example.org.
Figure 1- Source: Land Registry(http://landregistry.data.gov.uk/app/hpi) /London Stock Exchange (http://www.londonstockexchange.com/exchange/prices-and-markets/stocks/indices/summary/summary-indices-chart.html?index=UKX)
We have indexed the returns of the residential property market and the FTSE100 since the turn of the millennium. The House Price Index has returned 135% over that period (or an average annual growth of 9%), in contrast to a negative 8% return on FTSE 100. In between times, the volatility in the equity market versus the residential property sector provides some substance to the maxim of property as a safer asset class.
Of course, the question is whether this will continue. We contend that while some areas of the residential market are without doubt overheated (Prime Central London), there remains a wide opportunity beyond these discrete markets. Regionally, the valuations of UK residential property stand at over a 50% discount to Greater London according to the source Land Registry, with attractive yields and rental growth supporting the investment case for regional property.
There remains little doubt that Mr. Osborne’s attempt to construct a soft landing for Central London through increased stamp duty on second homes is having the required effect, though again we see opportunity in Greater London based around certain investment themes such as Cross rail. Overall we remain positive on the residential property market, with global disinflationary pressures suggesting a medium term view of low interest rates.
Figure 2-Source: Stata Wales(https://statswales.wales.gov.uk/Catalogue/Business-Economy-and-Labour-Market/People-and-Work/Earnings/averageweeklyearnings-by-ukcountryenglishregion-year) / Land Registry(http://landregistry.data.gov.uk/app/hpi)
The Price Earnings (P/E) ratio is defined as the average house price divided by the gross average weekly earnings. A measure of valuation and affordability, the P/E ratio for the sector expanded 4% in England and Wales in 2015, versus 11% for London, as calculated from our above mentioned sources. Relative to London, the P/E for England and Wales, excluding London, now stands at a 57% discount.
Figure 3- Source: Building Societies Association(https://www.bsa.org.uk/statistics/mortgages-housing)
As England/Wales property values continue to grow at a 4-5% annual growth rate as per Land registry, it makes the private rented sector more convenient/affordable for an average household. A marginal improvement in the mortgage lending market and government initiatives such as Help to Buy are, in our opinion, unlikely to be sufficient to check the trend for growth in the PRS market.
Figure 4- Source: Land Registry(http://landregistry.data.gov.uk/app/hpi)
Looking at house price growth over the past 10 years, Greater London has demonstrated a remarkable 87% versus 9.3% in England and Wales excluding London. We note the compression in London growth rates in recent years, due to several factors including a slower pace of overseas capital investment in Central London property.
Figure 5- Source: Home Let (http://homelet.co.uk/homelet-rental-index/london)
We have analysed the trend in rental growth over the past 12 months. Broadly, the rental growth markets have shown some softening, with Greater London rental growth slowing from 7.9% to 6.6%. Regionally the compression is more marked from 5.4% to 2.2%. This clearly has acted as a drag on sector yields.
Figure 6- Source: Bank of England(http://www.bankofengland.co.uk/boeapps/iadb/index.asp?Travel=NIxIRx&levels=1&XNotes=Y&C=5TU&XNotes2=Y&Nodes=X4051X4052X4053X4058&SectionRequired=I&HideNums=-1&ExtraInfo=true&G0Xtop.x=44&G0Xtop.y=4) /Home Let(http://homelet.co.uk/homelet-rental-index/london) /Land registry((http://landregistry.data.gov.uk/app/hpi)
Net rental yields for the residential market have compressed slightly in the last 12 months, to 3.45% from 3.57%. Regionally (ex Greater London) net rental yields are currently around 4.5%. In a low inflation, low interest rate environment, these yields remain attractive by comparison with other asset classes. For example, the yield on 10-year government securities currently stands at 1.78% whilst retail savings rates remain at low historic levels. Upward inflationary pressures seem remote, though as a determinant of monetary policy will be closely watched. For now, we would not expect a significant correction in the yield premium of the housing market.
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