The Investment Property Market Overview 2021 & Predictions for 2022

The Investment Property Market 2021 an Overview

& Predictions for 2022

Residential Estates is a private UK-founded property services group that has operated for over 30 years. Providing investment advice, property investment sales throughout the UK at some of the most prominent high yielding developments, and asset management, combining both short and long term lettings, as its core services.

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If the residential property market defied expectations in 2020, then its performance in 2021 was even more unexpected. Despite predictions of an ‘inevitable’ downturn at some point in the year, property values kept on rising, as did average rental returns.

In this review, we’ll look at some of the reasons for this continuing strength, and whether those same factors could continue to buoy up the sector in 2022.

Average UK Property Values This time last year, many (if not most) sources were expecting values to plateau in 2021.

The reasoning looked sound enough: the pandemic was returning in successive waves, certain sections of the economy were all but shut down, and a large proportion of the working population was on furlough, living on 80% of their usual incomes.

Logically, all the attendant uncertainty and reductions in consumer spending power should have put an end to the astonishing price rises that had been witnessed in 2020.

Over the course of 2020, the ONS* calculated that average values rose by 8.5% to reach a record high of £252,000. This, it observes, was “the highest annual growth rate the UK had seen since October 2014.”

It seemed unthinkable that, with all that was happening, the market would see that same positivity in 2021.

In the event, of course, it did. On 17th November 2021, ONS published its UK House Price Index for the 12 months to September, and found that house price growth had actually accelerated, to a new high of 11.8%.

That brought average values to a record £270,000 – a real-terms increase of £28,000 on the same time last year.

*The ONS is often regarded as the most accurate barometer of residential property values but plenty of other agencies – including banks, building societies and estate agents – publish data of their own. Since the onset of the pandemic, their figures have tended to be more up to date than those of the ONS, but their methodologies produce a considerable degree of variation.

Price Growth Calculations Survey valuations and mortgage applications tend to feature strongly in the methodologies used by banks and building societies. That may be one reason why their house price indices suggest higher rates of growth than those published by estate agencies, which work mainly on the basis of asking prices or ‘price paid.’

Price Growth Calculations contd.

Lenders’ Data On 5th November, the Halifax House Price Index cited a year-on-year growth rate of 8.1%. That represented a month-on-month change of +0.9%, a quarterly change of +2.3%, and an upturn of 13.2% since the start of the pandemic – equivalent to an extra £31,516 in value.

Nationwide quoted an even higher rate of growth. In its December HPI Report, it calculates that average values rose by 10.0% in the 12 months to November 2021. That marked a monthly change of +0.9%, bringing mean values UK-wide to £252,687. “As a result,” it says, “house prices are now almost 15% above the level prevailing in March last year when the pandemic struck the UK.” Agency Data Rightmove, Zoopla and the property search site ‘Home’ all quote lower rates of capital appreciation, but their respective figures cluster quite closely together.

• On 15th November, Rightmove estimated annual price growth at 6.3%, and mean values at £342,401.

• Zoopla figures, published at the end of October, indicate price growth of 6.6%. Its November estimate of average house price values was £325,661.

• Home ‘s November Asking Price Index suggests a growth rate of 6.7% across England and Wales, and a mean value of £344,239.

Reasons for Continuing Growth

The furlough support scheme undoubtedly helped to protect millions of people’s incomes and allowed them to keep paying their rents and mortgages. This, and the support for the self-employed, therefore played an important role in keeping the housing market stable.

The NHS vaccination scheme also played a key role – permitting an earlier end to Covid lockdowns and allowing beleaguered parts of the economy (especially retail, travel, tourism and hospitality) to get back on their feet. This prevented a more severe economic downturn and meant that fewer people than expected lost jobs and incomes.

The stamp duty holiday helped to energise the housing market when it was at risk of flagging, prompting high levels of market activity that often defied the usual seasonal patterns. By stimulating buyer demand, it also had the effect of boosting competition amongst house-hunters and thus, it helped to drive values higher.

The lockdown periods also caused many people to reappraise their priorities in terms of what they wanted from their living arrangements. ‘More space’ was a common answer: space indoors to work and live, and access to open spaces outdoors, whether in the form of gardens or parks, or access to countryside and coastline.

‘The race for space’ proved to be a significant driver of demand, and the effect was especially pronounced in the market for larger homes and properties in more rural and attractive locations.

Price Moderation As of November 2021, the cost of living is currently rising at a rate of 4.2%, according to the latest ONS data. Consequently, all the figures published by the previously mentioned lenders and estate agents imply inflation-beating returns – and that’s on the basis of capital appreciation alone. Add rental returns to the equation, and it’s clear that many investors will have seen very impressive results this year.

However, while the numbers are undeniably good, there are hints now that the rate of house price growth might be slowing. Rightmove’s 6.3% figure in November compares against 6.5% the previous month, and Home reports that “asking prices across England and Wales have fallen this month for the first time since December 2020.” ...before reading too much into this, it’s important to recognise that some of these numbers are being skewed by significant regional differences.

UK Regional Variations – House Prices In a news article dated 26 October, Zoopla examines these regional variations and concludes that in what proved to be the busiest housing market since 2007, annual house price growth stood at 6.6% across the UK as a whole. However, beneath that national statistic lies a wide gulf in performance. It reports: “Price growth continues to be strongest in regions where property remains affordable, with Wales seeing the strongest gains of 10.4%, followed by the North West at 8.8% and Northern Ireland at 8.3%.”

Illustrating the point, it finds that – at a local level – the strongest capital gains were to be found in Liverpool (10.4%), Manchester (8.7%), and Sheffield (7.8%.) The Scottish cities of Edinburgh, Glasgow and Aberdeen all made its top 20, as did Newcastle, Leeds and Belfast.

Looking a little further south, Nottingham saw gains of 7.3%, Leicester saw 7.2% and Birmingham saw 6.1%. By Zoopla’s reckoning, the best performer from the South was Bournemouth with price growth of 6.9%.

“At the other end of the spectrum,” it says, “London (where a typical property costs 11.5 times average earnings) recorded price growth of just 2.3%. The capital was the only region in which gains were below the five-year average.”

Figures from Knight Frank paint a similar picture. They show that only 3 boroughs in England and Wales saw the average value of their housing stock fall, year on year, and they were all in London: Westminster (-10.1%), Lambeth (-2.2%) and Wandsworth (-1.1%).

Meanwhile, the estate agent reports that the top three areas for growth were all in the North West: Rossendale (+24.2%), Wirral (+21.6%) and Liverpool (+21.6%).

The figures follow an October report from Rightmove, which lists the UK’s top 20 residential property markets for price growth. It states: “Toxteth in Liverpool is … the new top price hotspot, seeing the biggest rise of 20% in average asking prices over the last year. Accrington in Lancashire, Retford in Nottinghamshire and Heywood in Greater Manchester have all seen rises of 19% in average asking prices.”

The North West does not entirely dominate, however. In fifth and sixth places in Rightmove’s table come Brixham in Devon, and Crowborough in East Sussex, both of which produced capital gains of 18%, matching Aberdare in southern Wales. Leeds saw mean property values rise by 17% and the final places in the top 10 were again taken by boroughs in the North West: Penwortham in Preston (17%) and Great Sankey in Warrington (16%).

Rental Values Of course, property investors don’t only look for capital growth. Rental yields are also crucially important, so it’s worth looking back to see which regions have produced the best results in 2021.

Nationally, most residential landlords should have seen rewarding monthly returns.

According to the Homelet Rental Index, rental values increased by an average of 8.7% over the last 12 months. Hamptons quotes an even higher figure: 11% as an average of all UK regions outside of London.

UK Regional Variations - Rent However, the pattern has been decidedly chequered across Britain as LiveYield’s regional summary demonstrates. Yields tend to be higher where prices are most affordable, but there has been one surprise this year. The property portal’s top five include Scotland (5.7% yields), North East (4.9%), North West (4.8%), Yorkshire & Humber (4.5%) and – unusually – the South East, which has also delivered rental gains of 4.5%.

Those top four might rank amongst the UK’s ‘usual suspects’ but the highly-priced South East does not often make the cut. In 2021, however, it outperformed Wales, the East and West Midlands, the South West and the East of England. Less surprisingly, it also greatly outperformed London itself, which LiveYield treats as a separate regional market.

One reason for the strength of the South-eastern market might be what became known this year as ‘the London Exodus’; a prolonged outward migration of homebuyers and tenants, who left the capital in search of more space, bigger homes, better home-working facilities and a generally better standard of living. This raised demand in outlying areas but prompted residential demand to plummet in central London, which saw declines in both rental income and average values.

To illustrate the point, the Hamptons Letting Index reports that average rental values fell for 21 consecutive months in central London and that, in November 2021, rents were “20% below where they stood before the pandemic.”

For perhaps the same underlying reason, London has also struggled to realise strong capital growth. According to the most recent report from ONS, “London continues to be the region with the lowest annual growth (2.8%) for the tenth consecutive month.”

However, all those residents who left the capital had to go somewhere and, for many, that meant finding homes in attractive commuter belt locations. That might be one reason why both rental values and capital values have remained so resilient in the South East. Excluding London, Hamptons finds that the region saw rental gains of 13% year on year.

The South West has been another beneficiary of the 2021 exodus, with Devon and Cornwall both attracting massive interest on the part of home buyers and tenants. Hamptons notes that the region produced the UK’s fastest rental gains in 2021, averaging 15.3% year-on-year. Other winners included the East of England (10.3%) and the North of England (9.5%).

London: a Note It is worth observing that the central London market has experienced a modest revival in recent weeks. Newspapers have reported that ‘super-rich’ foreign investors have begun to return to the city, driving values upward again in certain exclusive neighbourhoods. It’s a trend that will be worth monitoring in 2022.

Forecasts for 2022 Though we’re not quite at the end of 2021, the market is seeing signs of certain changes that might well persist into 2022.

Interest Rates One of those is the rising rate of inflation, which stands at 4.2% in November 2021 but which the Bank of England has said could rise to 5% or more by April of next year.

This is a double-edged sword for investors. On the one hand, a rising cost of living will reduce the real-terms value of rental income and capital growth. But on the other, when the rate of inflation exceeds the rate of interest paid on mortgages, the real-terms cost of repayments actually gets smaller. Moreover, if capital values look set to rise at above the rate of inflation, the mathematic case for investment becomes stronger still.

However, there is another associated factor, which is the Bank of England’s remit to keep the inflation rate close to its 2% target. One of the ways it tries to do that is by setting the base rate of lending. When inflation is rising, so the theory goes, one way to rein it in is to reduce the supply of money in the economy by making it more expensive to borrow. This will tend to limit the spending power of individuals and businesses and, thus, the prices of ordinary goods and services should tend to stabilise.

That aim of ‘making it more expensive to borrow’ is not necessarily something that its Monetary Policy Committee is keen to do when the UK economy is struggling to recover from the pandemic and when businesses face new restrictions on their ability to conduct international trade. However, the 5% inflation rate forecast is so far beyond its stated target that most commentators now believe that one or more increases in the base rate are inevitable. If it rises, then lenders will start to raise the interest rates on their own financial products, and investors who have variable rate mortgages, or those seeking mortgages for new acquisitions, could face escalating costs.

In recent years, interest rates have been exceedingly low. Some journalists have commented that there is now a whole generation of young homeowners and investors who have never known anything other than a climate of cheap finance. To them, rising borrowing costs could come as a shock and, if those costs rise too steeply, that could have a constraining effect on future house price growth.

Against that, most would argue that the Bank of England has already signalled that any increases would be relatively small and incremental. Moreover, common sense would suggest that the MPC won’t want to risk sabotaging Britain’s fragile recovery by making it too costly for businesses to invest in new growth. It faces a difficult balancing act, but the net result for investors shouldn’t be unduly worrying.

Average Incomes The cost of government support measures during the pandemic – measures such as furlough, support for the self-employed, and special assistance for certain hard-hit sectors – has led to almost unprecedented levels of borrowing. In his Autumn Budget, the Chancellor, Rishi Sunak, made it clear that some of that debt now has to be repaid, and that will take the form of higher taxes.

Taking account of changes to National Insurance, tax thresholds and other factors, the Resolution Foundation wrote that by 2026-27, “tax as a share of the economy will be at its highest level since 1950, amounting to an increase per household … of £3,000.”

The effect of rising taxes equates, very obviously, to a reduction in spending power.

That should act to reduce inflation – a welcome side-effect, perhaps – but it will also make people feel poorer. That, in turn, has a depressive effect on market sentiment and, in the property market, that can contribute to a slower rate of house price growth. This is entirely consistent with common sense: if people feel that they have less to spend, then they will be less willing to meet higher asking prices and, to make a sale, vendors may well be forced to ask more affordable prices.

Unemployment rates could also feed into this equation. Thus far, many more people have retained their jobs than was feared towards the end of 2020, but we can’t know what will happen next year. Furlough support has recently ended, and many businesses are now struggling with supply chain disruption, rising costs and new restrictions on international trade. In addition, rising infection rates internationally suggest that further lockdowns are not entirely out of the question. If these or any other factors force certain employers to shed jobs or cease trading, the economy could see more families with less to spend.

For now, these are simply ‘unknowns’ and the UK’s faster-than-expected economic recovery in 2021 suggests that such considerations might be unnecessarily gloomy.

On the positive side, the NHS vaccination programme continues to be successful and job numbers are currently much higher than even the government’s own agencies had predicted last year.

House Price Forecasts Taking account of all these variables, five estate agencies have raised their heads above the parapet to make house price forecasts for 2022.

Hamptons and Savills both predict average growth of 3.5% next year. This is between the 4% proposed by Knight Frank and the 3% forecast by Zoopla. The outlier is Strutt and Parker, which expects to see more robust growth in 2022, amounting to 7% over the course of the year. However, it hedges its bets by suggesting a ‘downside risk’ of just 2%.

Otherwise, the forecasts cluster around the 3.5% mark, which is a long way below the rates of capital growth we’ve seen in 2021. That represents an expectation that the market will slow overall. With real incomes falling, taxes and inflation rising, furlough support ended and no stamp duty holiday to buoy things up, that expectation seems reasonable enough.

However, despite everything, the forecasts are still positive and there are good reasons for that. In fact, they are the same fundamental reasons that have kept the property investment market so robust and rewarding for so long. They boil down to a simple but significant imbalance between supply and demand for property.

Property Market Fundamentals The continuing shortfall in the supply of property won’t come as a surprise to anyone.

Indeed, it can feel like a permanent feature of the UK residential market. It’s one of the principal factors that is always cited by lenders and agencies when explaining the continuing growth and resilience of house prices. Propertymark reports that in some estate agent offices this year, the ratio of prospective buyers to properties has been as high as 24 to 1, and that “the number of available properties per branch has decreased to 21, the lowest figure on record.” The effects on prices are obvious: with such an imbalance, people looking to buy or rent are forced to compete against one another by raising their offers or by paying higher rents.

In September, RICS said it had recorded the largest ever gulf between the supply of rental property and demand on the part of tenants. Not only that, but after a year of frenetic housing market activity, it found that “the stock of buy-to-let properties (was) growing far slower than before.”

In mid-November, Savills updated its 5-year Mainstream Residential Forecast, which considers how the market might perform with regard to both capital and rental values between now and 2026.

House prices, it believes, will continue on the same trajectory that the company set out in the summer. Its forecast to 2025 is unchanged, but it predicts a gradual slowing towards 2026 that results in cumulative 5-year growth of 13.1% nationally.

Beneath the national figure, it also sets out regional forecasts. These are led by the North West and Yorkshire & Humber, both of which it expects to produce gains of 18.8% by 2026. London is expected to be the poorest performer, producing just 5.6% of growth over the same period.

Its accompanying Mainstream Rental Forecast predicts growth of 19.9% UK-wide. However, in anticipation of a reviving rental market in London, it expects to see better returns in the capital, amounting to growth of 22% over the next 5 years. (However, returns from Prime Central London and its commuter zone are expected to be lower.)

Savills provides some rationale for this in its Winter 2021 Forecast, which suggests that the capital will fare better as international travel resumes. More generally, it points to a continuing shortfall in supply, which should help to keep prices elevated across the whole of the UK. It states: “Even with a £12 billion Affordable Homes Programme, we won’t get back to 2019 levels of housing delivery until 2026.”

Summary Numerous factors helped to make the UK’s residential property market exceptionally rewarding for investors in 2021. Some of those will persist into next year. Most notably, they include the NHS vaccination programme and the continuing surplus of demand over supply.

Other recent drivers of demand – the stamp duty holiday and furlough support – will not be present next year, and it’s probably safe to assume that ‘the race for space’ will also be less influential in 2022.

There will also be new challenges next year – not least a rising tax burden and the possibility of higher borrowing costs.

As a result of these changing conditions, most forecasters expect house prices to grow at a rather slower, steadier rate than we saw in 2021. In many respects that might be a good thing because any force that strains affordability too far is likely to be followed, eventually, by a backlash. No one wants to see a price crash, so many will welcome a period of steady, more predictable growth along the lines now being forecast. In the long term, a more modest but sustainable growth rate should deliver more secure market conditions for investors.

On the rental side of things, growth expectations follow a similar trend: upbeat but restrained, averaging around 4% annually for the next 5 years.

Collectively, the rental and capital gains expected to be achievable in the years ahead should far outpace the rate of inflation, unlike the returns on options such as savings accounts, ISAs and bonds. Moreover, the enduring strength of property demand, on the part of both buyers and tenants, looks set to make property a far more dependable asset class than most other forms of investment. Its strong foundations should make it less subject to price volatility, and better placed than most to weather out any periods of economic upheaval.

In short, the residential property market of 2022 might not break as many records as did 2021, but it should remain a secure and rewarding choice for investors.