Invesmore long-term UK residential property market predictions

This is the first iteration of a post which will definitely grow over time…

If you’re familiar with Invesmore, you’ll know we track hundreds of thousands of properties everyday. In a sense we are ‘whole market’ property consultants. Our mission is to help investors find the best deals possible. Part of giving our best advice is to understand the long-term property trends in the UK property market.

Collectively we work to a set of simple principles when thinking about property:
– Will you attract the right tenants?
– Is the property mortgageable?
– Is the property going to go up or down in inflation-adjusted terms?

Were going to concentrate on the question about capital growth.

When we analyse any area in England and Wales, we look at inflation-adjusted capital growth based on median property prices for all property sold within an MSOA during a given period of time.

or translating this… We look at the middle price of all properties sold within a government census area of around 10,000 people and 4000 properties. This sample size is big enough so we get sufficient sales volumes and small enough to be helpful when analysing neighbourhoods or parts of cities and towns.

The following screen grab shows a very high level view of England and Wales, looking at capital growth. The main takeaway: we have a lot of data and we can visualise it.

We tend to reference 4 timeframes:
– Long-term: 2007 to end of 2019
– medium-term: 2013 to end of 2019
– Short-term: 2017 to end of 2019
– Recent: last 12 months

2007 is a very important moment in UK property price history. In order to get a sense of real property prices, it’s helpful to think in terms of property price to earnings ratios. Essentially if the ratios become too high i.e. 15 times average earnings to buy a property, then that property will be very unaffordable.

Earnings to property price ratios were at their highest in 2007. The last time property prices with this high relative to income was 1895! (see image below)

So when we analyse areas we start off with comparing inflation-adjusted median property prices from 2007 versus late 2019.

The rules we follow when analysing house price data are:

House prices reflect economic strength.
If house prices are equivalent or higher than 2007 in inflation-adjusted terms, it tells us that an area might be popular with people who with a higher social grade i.e. A or B. These people might have come into an area and ‘gentrified’ it. Or a city or region might be very economically robust and there might be localised wage inflation, which means those people have more buying power and therefore are able to pay more money to live in a desirable area.

House prices represent desirability
Even in the most economically robust cities, there are areas which failed to get meaningful inflation-adjusted has price growth. Typically when you analyse the data and look at the demographics it turns out those capital growth ‘black holes’ are areas suffering from chronic deprivation i.e. council estates or ethnic minorities who haven’t had the opportunity to economically progress.

Let’s look at a few examples:

Example 1

Example 2

Example 3

Our general rules:
– If an area or city averages below -25% growth, that’s a bad sign for the long-term economic strength of a city or town. -25% means that if you bought a property in 2007 for £75,000 and you sold it today, if you adjust for inflation, your property would be worth 25% less in real purchasing power terms than in 2007.
– When looking at an area, it’s not good enough to have a few small capital growth hotspots. Capital growth should be pervasive across a whole city. Manchester is a good example of solid long-term capital growth.

By now you might be asking… Where is the prediction?

If we assume that:
– Property prices in real terms over time reflect consistently solid economic strength
– And economic strength comes from people being economically productive by pursuing activities which add value to the marketplace. For example, someone working as a server at McDonald’s might have less economic value than a computer programmer who can create a system to make a whole factory more efficient.
– Gross domestic product is a reasonable indicator for the amount of money flowing in the economy. If GDP is high, there’s plenty of money circulating. If it’s low, the opposite. If local GDP for a city i.e. London is high compared to Blackpool or Sunderland, you can say that people in London have more disposable wealth than those in Blackpool.

The following chart shows the long-term correlation between house values and gross domestic product in the UK. Or more speciifically: UK GDP growth against the MSCI all property total return

Source: Source: MSCI, Oxford Economics, CBRE | Original article

Wikipedia say of the CBRE: CBRE Group, Inc. is an American commercial real estate services and investment firm. The abbreviation CBRE stands for Coldwell Banker Richard Ellis. It is the largest commercial real estate services company in the world.

The MSCI all property total return is an index that is mostly made up of large institutional property portfolios i.e.lots of prime office space, large residential blocks and other significantly big assets.

Neil Blake, Ph.D., Ruth Hollies, the authors of this research say: “While this is a simplistic view of the world it is visually very strong (and more so in a downturn), as shown [in our chart]. This makes grim reading for 2020 as a significant fall in GDP is on the cards ̶ CBRE’s house view is for a more than 8% fall in UK GDP, which would equate to roughly a 32% fall in returns on this basis.”

This chart is a very clear example of the close relationship between gross domestic product and property prices.

If we assume GDP and house prices do correlate, localised level and national level, then the next question is; what are the future prospects for GDP growth in the UK?

Brexit.

The UK government has commissioned numerous research works on the potential GDP impact from Brexit. The following chart is from a report published in October 2019.

in this piece of research, the author Daniel Harari has looked at a number of different scenarios for how Brexit could play out. If you’re familiar with the latest updates on trade trade negotiations with the UK and EU, you’ll know that commentators are very anxious about a no deal scenario. In other words, there would not be a trade deal with the European Union, our largest trading partner. Instead we would have to work to World Trade Organisation rules.

Let’s assume the UK government is pragmatic and negotiates some kind of trade agreement with EU. And we have two go through the disruption economically separating from Europe, the government research suggests ( to me ) that will properly have a 5% – 7% decline in GDP over