Anyone following the Scottish property rental market in the last few years will have seen that rental incomes and property prices have once again started rising in 2013. As one leading property specialist put it ‘the housing market is unrecognisable from 12 months ago’. So what’s in store for 2014?
Cheap borrowing costs continue
Mortgage lending and transaction rates have increased substantially and mortgage rates are remaining at historic lows. The Bank of England, under new Governor Mark Carney, have indicated that they will be keeping interest rates at their current lows for the foreseeable future so it’s not surprising that over 60% of Landlords are planning to add to their portfolio in 2014.
Scottish house prices are rising faster than most of the UK with leading property data specialist LSL/Acadata Scotland quoting an average increase of 3.6% for 2013.
The Office of National Statistics (ONS) indicated a more modest price rise of 0.5% during 2013, but all data indicators show prices continuing to rise through 2018, starting with a modest 1 – 2% in 2014. Rental yields for 2013 in Scotland vary from around 9% to 5% depending on area and property, providing an expected annual return in 2014 of around 10 – 6%.
Property transactions for the final month of 2013 were up 27% on the same month in 2012. According to Acadata ‘Most estate agents are reporting a lack of new sellers coming to the market, which will have the effect of pushing up prices as buyers compete for the reducing number of properties available’.
When you consider that Mortgage approvals have climbed to a 6 year, pre-recession high, there appears to be significant upward pressure on housing prices.
House price increases for foreseeable future
Across the UK, the current trends in rising house prices is expected to continue with the Office for Budget Responsibility, adviser to the Chancellor of the Exchequer, now predicting house prices to rise across the UK by a further 27pc by 2018.
The Royal institution of chartered surveyors (Rics) also expects a continued rise in prices. Some 59pc more surveyors predict rises will increase over the next three months as the number of homes for would-be buyers to choose from continues to fall “well short” of demand.
Rics said surveyors are expecting sales to pick increase in 2014, but warned that without a “meaningful increase” in the supply of homes, house prices will become increasingly more unaffordable.
Young first time buyers are again bearing the brunt of the latest property increases and are again turning to rental properties as there is insufficient supply of affordable housing to get them on the property ladder. Demand for 1 and 2 bedrooms flats has seen the biggest increase in demand during 2013.
What’s behind these price increases?
- Relatively low new builds – new private house builds in Scotland in 2013 were only 35% of 2005 levels so it is expected that demand for housing will remain ahead of supply for some time increasing demand for rental properties.
- Economic improvements – after some years in the doldrums, the Scottish economy is also picking up with a recent rise in job vacancies reaching their highest level since before the recession in 2006.
- New government incentives – the Scottish Government launched is help to buy scheme in late 2013 giving new home buyers an equity loan of up to 20% of the value of a new home build.
- On-going low interest rates – we’ve never had interest rates this low in our history and they are likely to remain low for the foreseeable future (anyone remember 12% interest rates back in 1992?).
What’s driving rental market strength?
House prices are currently rising faster than wages
With average salary increases below 1% per annum. The cost of buying the average home is going up 2 times as fast as earnings leading to an increasing inability for the average resident to buy their own home.
Long term trend of more people renting
The percentage of people renting rather than buying property has increased across the UK with Scotland seeing renting more than double since 2000, and the trend looks only for further increases in those seeking to rent:
Long term decline in council properties
Housing available from Councils has fallen substantially since the right to buy policy was introduced in the 1980’s with almost 2 million sold across the UK since its introduction in 1980. Councils have not been able to come anywhere close to replenishing their stocks of housing.
Low yield on other investment options
With the Bank of England rate at 0.5% and most high interest accounts paying around 1.5% interest, placing your money in the bank will provide a low yield. Considering the Retail Price Index (as at Feb 18th 2014) is 2.8%, your real income return is actually negative.
Traditionally safe investments in UK Governments bonds are currently providing around a 2 – 2.9% annual yield, however for smaller investors these are only available via Bond Units Trusts which incur fees so actual yield will be lower. As with high interest bank accounts, this is lower that the current RPI. So investors looking for positive returns are having to look elsewhere.
What about the Stock Market?
Investing in the UK stock market has been a good alternative for the last 2 years, with returns on the FTSE 100 for 2013 at 14.4%, although if you invest in Stocks via Unit trusts you will be incur the additional purchase/sale fees and annual management fees. However, the stock market has a much greater volatility than the housing market so whilst increases in ‘bull’ markets will be bigger, you can expect bigger downside in ‘bear’ markets.
For a medium to longer term investor, property provides a more stable rate of return. It will not beat share investments in the short term when stock markets are booming, but neither will you have the large downside risk when markets plunge, like the recent August 2011 crash when stocks fell over 18% in 2 weeks.
Indeed, whilst the majority of financial commentators are expecting stock market increases in 2014 in the region of 6 – 9%, there are a number of contrarians that think we are in another bubble, fuelled more by speculators benefitting from the current cheap costs of borrowing than any strength in fundamental economic indicators.
As with any investment, we would encourage readers to do their own market research and decide for themselves what investment asset class suits their particular risk appetite and investment time horizon.
What are the risks for 2014?
Mortgage rate increases?
The latest Bank of England inflation report provided a major revision of it’s forward guidance on UK interest rates. Whilst previously the BoE had stated that they ‘may’ allow interest rates to rise when unemployment hit 7% (currently at 7.1% at the time of writing), the latest report also indicates that ‘there remains scope to absorb spare capacity further before raising Bank Rate’.
Reading between the lines the BoE would like to keep rates as low as possible for as long as they can. Typically low interest rates leads to higher inflation which would be a major problem for savers, retirees and anyone else relying on interest based income. But with inflation actually falling in the UK, this may just provide the BoE with the excuse to keep rates lower for longer.
Bank Of England Governor Mark Carney has pledged to keep the base rate at 0.5% until 2015 or beyond. However, given the current low rate, you should expect this to rise at some point, possibly in 2016, so if you have a mortgage for your property, now may be a good time to lock-in a longer term fixed rate with your current lender or switch to a better deal.
This is the big unknown. Firstly, will Scotland become independent? And if so, are we still going to use Sterling as our currency, the Euro, or a new Scottish currency?
Firstly, if the referendum results in a no vote, there’s no change to the status quo and you can expect borrowing costs for your mortgage to remain the same. If Scotland does become independent then things are a little bit up in the air at the moment.
George Osborne’s recent statement that ‘It’s clear to me I could not as Chancellor recommend that we could share the pound with an independent Scotland’ means that a currency union is unlikely. European leaders have also indicated that an independent Scotland would not be allowed to immediately join the EU and use the Euro as currency, suggesting that Scotland may need to create it’s own currency.
At the time of writing, political leaders are still wrangling over what currency Scotland will use. However if Scotland does indeed need to create it’s own central bank there is a risk that a separate Scottish currency would have higher borrowing costs on the international money markets which would translate to higher borrowing costs for Scottish mortgage holders.
It’s difficult to predict how this will be resolved in the event of a yes vote in the Scottish referendum as everything is very much up in the air. But our guess is that a Scottish government would be unlikely to allow Scottish home owners to suffer increased costs as a result of Independence. In a worst case scenario where Scottish interest rates are higher than South of the border, we could see some kind of government backed assistance to help Scottish mortgage holders.
Overall, we can expect house prices to increase through 2014, demand to rental properties to remain strong but with some uncertainty around the Scottish Independence vote. However, compared to other investment classes, we think property for 2014 and beyond still holds the best risk/return potential.