The last 10 years was undoubtedly the buy-to-let decade for the UK property market. Now as we start a new decade with a UK general election on the horizon, some investors are still reeling from the aftershock of the credit crunch and many more are wondering what the next decade will have in store for those who are invested in UK bricks and mortar.
While the old investment mantra is true about past performance being no guarantee of future returns - it’s also important that we analyze past trends and the key drivers behind the market in order to better understand the over-riding conditions that influence both the macro and micro economic environment and ultimately lead to wealth generation.
Looking back to look forward:
Over the past decade the average value of a UK house increased by 117%. While at first glance this would seem disappointing when compared to the 180% growth in the 1980s or indeed the extraordinary 409% growth of the 1970s it is only part of the story. Because this growth occurred in a low inflation environment, the real (or inflation adjusted) growth rate is actually 67% which stands head and shoulders above that seen in previous decades (see Graph).
The UK’s two biggest mortgage lenders both have their own unique methods of keeping score and therefore a unique set of data. But if we accept the Nationwide Building Society’s own set of figures that the average UK house rose by 117% between December 1999 and December 2009 - this averages 8% per annum or 6% per annum when adjusted for CPI inflation (real growth).
All very impressive figures, but the biggest story of the last housing cycle must surely be the change in attitude towards residential property as an investment asset and in turn the rise of the buy-to-let landlord.
The seeds for this change were first sown by the changes to Landlord and Tenant legislation in the late 1980s, but it was not until the late 1990s that banks moved replaced their previous commercial based mortgages, which did not take into account rental income, and replaced it with specific buy-to-let mortgages. This ment that the buy-to-let opportunity was no longer restricted to larger investors and those with significant levels of equity and so it became easier for the man on the street to obtain funding to buy property for rental purposes. The coincidence of low interest rates, poor stock market returns and opportunity for low cost gearing encouraged many equity-rich homeowners to become residential landlords over this period.
This resulted in high levels of take-up and as the Council of Mortgage Lending (CML) statistics clearly show. At the beginning of the decade the number of outstanding buy-to-let mortgages was a mere 75,000 but this figure rose to over 1.2 million by the end of 2009. It’s estimated that this rapid expansion of the buy-to-let market added around 1.3 million homes to the private rented sector. In 1989 the private rented sector accounted for only 9% of all homes in the UK, a figure that jumped to 13% by 2009.
A recent report from Halifax, one of the UK’s biggest mortgage lenders, show that fifty years ago, the average home cost £2,507 and one in seven had the loo outside. A half century on, the average home costs £162,085 - but spare a thought for the two in every 1,000 households that still rely on an outside loo!
Even when taking into account the so called housing “crash” of recent years, average house price inflation over the last decade has far outstripped average wage increases. House prices rose by 273% in real terms between 1959 and 2009 while the growth in real earnings was only 169% over the same period.
In my next article we will explore the reasons why UK house prices grow in excess of general inflation and look at how South African investors can benefit from this.
Wishing you health, wealth and happiness,
Mike Smuts
Property investor and MD of Smuts & Taylor.
