The housing and property market has changed dramatically over the last couple of decades, as any investor will tell you. First-time buyers in many areas of the country are finding it increasingly difficult to get on the housing ladder.
For those with money to invest, the buy to let market is still doing well. This is in spite of tax increases, the removal of tax benefits, and changes to what landlords and letting agents can charge. Not only does buy to let provide a stable, long-term investment with a strong return when you come to sell the property but you also benefit from increased revenue from regular rent payments.
Why It’s So Difficult to Buy
Chronic underinvestment in the housing market over decades has led to a supply shortage, there’s no doubt about that. On 13th March, Chancellor Philip Hammond outlined a revamp of the Affordable Homes Guarantee Scheme, putting aside £3 billion to support buying 30,000 properties for housing associations across England.
While some in the housing sector welcomed the initiative, many have pointed out that it still falls woefully short of what is required. According to the latest government figures, affordable housing to buy or rent may be growing but it still forms a small part of the actual market and is doing little to relieve the pressure.
The high cost of mortgages and getting together the initial deposit for a home is putting off a lot of potential first-time buyers who now see renting as a better or the only option on the table. Of course, there is the option for shared ownership, something that has been increasing in popularity over the last few years. But, in many parts of the country, that still leaves purchasers trying to find enormous deposits and having to manage untenable mortgages.
According to The Guardian recently:
“Currently a shared ownership two-bed flat in London is on sale for £985,000 at full market value, with the buyer taking a 25% share and expected to find £2,469 a month in mortgage and rent repayments.”
It’s no wonder, therefore, that so many people have given up the ghost and decided to rent. In the UK, we tend to take the notion of owning our home a lot more seriously than in Europe where renting is seen as a good option and where many people treat it as the norm. The problem is that the availability of affordable rental accommodation is also a huge issue.
The Price to Earnings Ratio is Widening
One of the main indicators of affordability is the price to earnings ratio. A recent review by Lloyd’s Bank found that this is increasing relentlessly and now presents a significant barrier in being able to afford a first home in many parts of the UK. The average home in a city now costs seven times more than the average yearly earnings.
Lloyd’s produced a list of the least and most affordable cities in which to buy a home. Oxford, for example, is the least affordable with the average home costing 11.5 times your annual salary. That compares to 10.5 times the annual wage for London and Cambridge. Even if you move further out to the South, in places like Southampton you are looking at 8.9 times the average earnings.
There is a significant north-south divide. Stirling, Londonderry and Bradford are the most affordable buys with prices between 4 and 4.5 times the average annual salary.
Wage Inflation Isn’t Keeping Up
It’s simplistic to say that stagnating wage inflation is playing a significant role in the number of people able to buy their own home. The truth is that house prices have been outgrowing salaries for at least the last couple of decades. After the 2007 financial crash, property prices recovered better than our annual salaries.
How Brexit is going to affect all this, of course, is anyone’s guess, particularly in light of recent events and the political turmoil it has caused. The truth is that, while wages fail to keep up, the issue of affordability is going to become an increasingly important factor in getting new blood onto the housing market.
The Rise and Rise of the Rental Market?
For those who find that affordability is out of their range, the only other option is to rent. According to a recent report by the Resolution Foundation, a third of millennials could well spend their entire lives renting rather than owning their home.
The creation of ‘generation rent’ may mean that we need to change our approach to owning that home. The report noted that there are some 1.8 million families with children who now rent rather than have a mortgage. Rents are on the increase which may make the housing crisis even worse in the future and many tenants have nothing left at the end of the month and are unable to even save for a deposit.
A shortage of rental properties coming onto the market are also having an impact and that could raise affordability because of supply and demand issues. Indeed, this is already happening in many parts of the UK, particularly in city regions.
The Need for More Buy to Let Investments
When the Government decided to bring in higher taxes for second homes and change the rules on what tenants could be charged for, many buy to let landlords complained that it was going to damage the rental industry. The truth has turned out to be a little different.
The rental market is widening and demand is increasing. Those investors who want to consider buy to let options are still likely to be in a pretty good place if they purchase a rental property. Several factors are contributing to this.
- Enough affordable housing is not being built – certainly not the 300,000 new homes that were promised by the Government each year.
- First-time buyers are finding it difficult to get a foothold on the housing market in many parts of the country, despite incentives such as Help to Buy.
- Those who own their home already are increasingly reluctant to move up and create space in the market because of the high costs involved.
More and more people are seeing the possibilities of residential property as a long-term, profitable investment. There is a shortage of rental properties at the moment that could see an increase of around 15% in rent levels over the next five years if demand continues to outstrip supply. There’s no doubt that buy to let landlords still have a pivotal role to play in the affordable housing market for some time to come.
If you’re considering adding buy-to-let properties to your portfolio, or as a first time investment, brush up on your knowledge by reading our Ultimate Guide To Buy To Let. For expert advice and first-class investment opportunities, get in touch with the team at Aspen Woolf today, our property investment specialists are always pleased to help.