Chapter 4: Understanding the Property Market
This is an extract from the ebook How to Really Buy a Property.
What's covered in this chapter
- Property prices since 1975;
- What drives property prices apart from salaries;
- What will happen to property prices over the long term;
- What is happening to the supply of new properties;
- The difference between national and regional property markets;
- How real property prices actually rise and fall every year;
- When you should shop for a bargain and when you should shop for choice;
- How you can end up trapped in the property search;
- When you should buy.
It is amazing how many people delay buying because they believe the market is falling, or rising too fast, or the market is steady and so may fall, and so on. In their defence they are encouraged to do so by the media which loves to paint all price rises as worrying and all price drops as the possible start of something bigger.
Friends, family and work colleagues are also very keen to offer their analysis, often based on that very same media. It would be interesting how many of these advisers would be interested in knowing what Estate Agents, Solicitors and Surveyors forecast for the industries that they work in!
How the market acts is actually surprisingly simple, but it is perhaps this simplicity that does not lend itself particularly well to headlines. It is crucial therefore to understand that:
- The current trend is for prices to continue to move up due to increasing demand for property and restrictions in new supply.
- Regionally markets move up and down all the time but this is rarely reported.
- The market has a traditional cycle that means that prices do move down quite regularly, usually twice a year.
The Current Trend in the National Property Market
The amount of land available to build on is restricted and the number of people who want to live in the UK is continuing to increase. One overriding principle to remember, in London, is that property prices have risen, almost continuously, since the end of the Second World War. In some parts of the city they have doubled every ten years over this period.
And the simple issue of supply and demand is expected to get worse. As of 2004 the Greater London Housing Authority Commission estimated that there was a shortfall of around 250,000 homes in the capital. That figure is expected to rise to over a million by 2020. In October 2012 the Future Homes Commission concluded the UK as a whole needed 300,000 - 330,000 new homes every year. And how many were built in 2012? Just 128,600.
Despite this well known trend the situation is likely to be exacerbated by moves such as the continued introduction of more conservation areas, the protection of green spaces and ever rising immigration.
It can be argued these go far towards improving quality of life. Protecting open spaces gives us places in which to spend our recreational time. Immigration provides us with a richer and more cosmopolitan mix of cultures which broaden our horizons. But ironically they also make the country an even more desirable habitat and increase property demand still further.
The graph below demonstrates the problem by showing the decrease in the number of new homes being built over the last forty years:
The credit crisis has decreased the number of new dwellings still further as construction companies struggled to raise finances for projects. This drop can clearly be seen in the graph above and was especially acute in the South East of England where the number of additional dwellings dropped by 32% in the financial year 2009-2010.
Furthermore this annual reduction seems to have become permanent since the credit crisis. 2013 saw 118,540 new dwellings completed. At no time since 1975 have more homes been in demand and so few built.
2015 offers a glimmer of hope but at 155,080 new dwellings completed this still remains half the volume required according to the Future Homes Commission.
We also need to factor into this the effects of migration to the United Kingdom. This is rising fast from around 200,000 in 2013 to over 300,000 in 2015 (according to the Office of National Statistics).
Some of these are migrant workers which increase demand for rental properties but many are also foreign investors who see purchasing UK bricks and mortar as a safe haven for their funds.
So while the number of new homes built last year might be up, the number of people who want to live in them is also on the rise.
In summary we have a situation where England and Wales are short of homes and the population is growing faster than they can be built.
There is an alternative measure published by gov.uk which looks at the Net Additional Dwellings. This takes into account not just new build completions but also demolitions, conversions and changes of use (such as from commercial to residential).
This data has been collected since 2004 in which year there were 185,550 additional dwellings created in England. The number peaked at 223,530 in 2008 before sinking to a record low of 124,720 in 2013. 2015 shows a marked improvement at 170,690 but still far too little.
To put this in some perspective over the last decade the number of additional dwellings has grown by 1,6730,000 while the UK population has swelled by some five million and all this happened in a country that was already short of housing in 2004.
All this points to long term price rises but we must be very clear here. Long term does not mean continuous, just that property prices will be higher in ten years time than they are now but there might be falls along the way.
As a perfect example most people believe property prices in London rose non-stop between 2000 and 2008 (when the Credit Crisis began) but the truth is very different. Prices fell three times. Once in 2001 by 6%; then again in 2004 by 3% and once more in 2005 by 4%. They were not year on year falls but quarter on quarter so the graphs that most of the media use for reporting showed nothing.
The Difference with Local Property Markets
National property prices dominate the headlines and can often eclipse all else. But only investors search on a national level, most buyers are looking to purchase in a particular location.
and all the others, when you
purchase the ebook How to Really Buy a Property