A rising population versus limited space and an insufficient wherewithal to build new houses means that prices rise over time. Apart from an accessional blip – the last being during the early years of the global financial crisis – the uptrend always reasserts itself. Pent-up demand eventually puts a floor under prices.
Zooming in is always more difficult. Not for the first time, house price surveys conducted by competing lenders come up with apparently differing conclusions about where house prices are currently heading.
Halifax says house prices fell by 0.1% in the three months to June compared with the previous three months. It also calculates the current annual rate of growth as having fallen to just 2.6% – in other words, below inflation (1).
Nationwide is more upbeat. It says prices rose by 1.1% in June and puts annual house price growth at 3.1% – so, a bit more than inflation. Interestingly, the accompanying Nationwide report includes a chart showing new buyer enquiries and new instructions both in broad declining trends and at or below the 0% growth per annum level (2).
None of this is unusual. However, for the unusual, we needn’t look far.
Britain is on course for an arms-length relationship with Europe for the first time in more than 40 years and the pound has fallen by almost a quarter against the US dollar over the past three years (3). Meanwhile, interest rates could be about to rise from an historic low of 0.25%.
On the face of it, concocting a storm for UK property prices could hardly have been more perfect. Taking last things first – the possibility that Britain leaves the EU in March 2019 – the initial implication is that external demand for living accommodation is about to fall.
One of the earliest pointers was last month’s revelation that EU applications for nursing positions had fallen by 96% since the Brexit vote (4). If this single statistic transcends into a waterfall of similar shortfalls in migrant workers, the effects could prove profound.
The fall in the pound has debateable consequences for the property market. From the perspective of foreign buyers, UK houses have just had a 25% price cut. Based on the Nationwide’s average UK house price index, a foothold in Britain can now be bought for about the same dollar price as in 2009 (5).
Against that, one of the reasons for overseas property investors coming to Britain in the first place – safety – has suffered several blows. The sharp fall in sterling, Britain’s intention to go it alone outside Europe and the onset of a new kind of political uncertainty – a radical opposition party in parliament polling more strongly than a minority government – mean added insecurity.
With such uncertainties raging and Europe’s economy recovering, an overseas investor might well be considering Paris, Frankfurt or Madrid as a more viable alternative.
Then there are interest rates. Up to now, the Bank of England has been very reluctant to raise rates, even with inflation moving above the Bank’s 2% target. It is concerned about the possible impact of Brexit on jobs and the economy, as well as persistently high levels of consumer debt.
In theory, that past reluctance to tighten policy could mean that rates will need to be raised further in future than might otherwise have been the case. Data out this week from the British Retail Consortium showed overall retail sales growing by 2.0% in June (6). That’s despite the lack of any real growth in wages, made worse by the cap on public sector pay.
The well-worn but nonetheless legitimate concern is the disproportionate impact that even a modest rise in rates from such a low base would have on monthly loan repayments and, therefore, affordability.
Speaking of which, at about nine times the average annual salary in 2015, UK houses are already out of reach of large parts of our society (7).
Property bulls may note that none of this gets away from that zoomed-out picture of the housing market: property prices suffer downward moves from time to time, but they always recover then move higher in the end.
There is the enduring allure of property – that feeling of safety in bricks and mortar when all else fails and the intrinsic utility of an asset than can be lived in, by us, our families and even our friends.
There is another outside possibility though. We might just have lived through a golden age for property – much like the one for final salary company pension schemes – that is both finite but long enough for us to forget what went before.
Should this turn out to have been the case, then the implications for investors could be starkly different, depending on their individual circumstances. For example, investors with the vast majority of their assets composed of equities and bonds, allocating a proportion of those assets to property – at home, perhaps, and overseas, probably – may continue to make sense.
However, for those whose principal asset is their home, it could make more sense than ever to have additional assets as uncorrelated as possible with UK house prices.
Fidelity’s Select 50 list has options for both types of investor. The iShares Global Property Securities Equity Tracker Fund offers a worldwide exposure to property – mostly commercial but some residential – and currently has only a small direct exposure to the UK (less than 5% at the end of May).
The Rathbone Global Opportunities Fund seeks out “under the radar” or unloved growth stocks worldwide. The portfolio contains relatively few individual stocks – around 60 – and offers a substantial exposure to both US and European companies.
Investors seeking an income from equities can diversify as well, by investing in a global dividend fund. The Select 50 list contains two of these – the Fidelity Global Dividend Fund and the Invesco Perpetual Global Equity Income Fund. More than four fifths of each of these funds is currently invested outside the UK.
Graham Smith, Market Commentator
Graham has worked for some of the biggest names in the City, including Schroders, Invesco Perpetual and Gartmore, as well as the World Economic Forum in Davos. Today he writes independently on a range of market and investment issues.
1 Halifax, 07.07.17
2 Nationwide, June 2017
3 Bloomberg, 10.07.17
4 BBC News, 12.06.17
5 Nationwide, June 2017
6 British Retail Consortium, 11.07.17
7 ONS, 07.10.16
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