Assetz® News - Optimism shows the long-term face of UK property investment

Optimism shows the long-term face of UK property investment

30th July 2007 |

It is just a few more days until the Bank of England's monetary policy committee (MPC) meets to discuss their next interest rate move. July's rise, voted for by six of the nine MPC members, was not hard to predict, given that June had seen a vote against by just five to four, with the minority including governor Mervyn King. This month may not be so hard to call either, given the extreme rarity with which the MPC has raised rates two months in succession, preferring instead to assess the impact of its previous month's move.

Already higher rates appear to be having an impact on the residential housing market. Last week the latest Nationwide housing survey showed house price inflation in July to be just 0.1 per cent, the lowest in 15 months. Property consultancy Hometrack has come up with the same monthly figure, with the annual price rise dropping from 6.4 per cent in June to 5.9 per cent in July. Hometrack's director of research, Richard Donnell, said the trend was an "inevitable" consequence of higher interest rates.

A third set of figures, albeit for June not July, also suggested a slowdown, these, from the Land Registry, showed an overall June price rise of 0.4 per cent, down from May's 0.7 per cent. The figures came with the caveat that there was significant regional variation, with London prices again rising much faster than the country at large at 1.5 per cent for the month and 15.8 per cent for the year, while the West Midlands rose by 1.2 per cent. In contrast, Wales, with negative growth of 1.1 per cent, topped a list of regions seeing price falls.

Even this trend may not be continuing, something the Land Registry's July figures may bear out. Hometrack's statistics showed a 0.7 per cent rise for London in June but just 0.2 per cent in July. Even the runaway house price inflation train that is the capital, it seems, could be hitting the buffers.

So what does all this mean for the buy-to-let industry? The answer, surprising as it may seem to some, is not a lot. Anyone believing that this sector will catch a cold when the residential housing sector sneezes may not be taking into account the key facts, according to the Money Centre, whose latest survey makes for interesting reading.

This survey shows that, far from optimism being dented by rate rises, it is increasing. In June 71 per cent of landlords said their prospects were either good or very good. The July figure is 73 per cent. Similarly, 75 per cent said they were still making a profit on their investments, higher than the 73 per cent recorded in February, when the base rate was 5.25 per cent. Add to this the fact that 69 per cent saw property as a better than average investment and the picture is anything but gloomy.

Lynsey Sweales, the Money Centre's marketing and PR director, has a simple explanation for the trend: "Higher interest rates may cause a little short-term pain for some landlords, but the majority know it's an excellent long-term investment and are confident that it is still outperforming other investments."

Herein lies the difference: in the residential housing market, mortgage repayments and the short term-prospect may put off the average buyer, whose understanding of the long-term possibilities may be limited and whose ability to meet hefty short-term financial demands may be particularly strained. To investors who are better equipped on both counts, not least with the knowledge that long-term trends may produce healthy returns, the same will not apply.

As the housing market slows down and the impact on those with higher debt repayments reduces their spending power, so consumer spending may be expected to fall and inflation with it. This, after all, is the purpose of the MPC raising rates in the first place. Such a reduction in inflationary pressure will then enable interest rates to fall. Reason for long-term optimism indeed.

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