House prices have jumped 10.9% in the last year, the first double digit annual growth figure since April 2010. The average residential property in the UK is now worth £183,577, and in London the number of properties worth more than £500,000 has increased from 13% of sales in 2007 to around 25% in 2013, according to the Nationwide House Price Index.
The housing market is certainly buoyant – boosted by Government measures such as Help to Buy, and record low interest rates, prices in London are currently 20% higher than their pre-crisis levels.
Nationwide’s chief economist Robert Gardner said After several months of moderation, the pace of house price growth picked up in April, with prices rising by 1.2% during the month.”
Gardner added that earnings growth is beginning to pick up, with wage increases finally outpacing the rise in the cost of living in February, but raised concerns that house price growth is outstripping income growth by a wide margin.
“The risk is that unless supply accelerates significantly, affordability will become stretched,” he said.
For British homeowners bricks and mortar mean more than just a roof over their head – property means investment, and five million of us are relying on their property to fund their retirement, despite the risks involved. According to a survey by crowdfunding platform Property Moose, five times more Brits would rather invest their savings in residential property than a pension.
But the residential property market may have delivered for the baby boomer generation, but first time buyers in 2014 are extremely unlikely to benefit from tenfold property price increases over the next 20 years.
It may not be enough to simply sit on a house and expect it to accrue value, but there other ways of making property pay. According to Paragon Mortgages, over the last 18 years buy-to-let outperformed all other major asset classes. Income from rent can boost property market returns by up to a third, and provide an annual return of 11%.
It is not just residential property market that is rallying, the commercial property market – which can be uncorrelated – has grown in value too, and investors are cottoning on.
The latest Investment Management Association figures show that commercial property funds were the fifth most popular sector among ISA investors in the 2013/14 tax year. Private investors poured £292 million into property funds in the 12 months to the end of March – more than double what was deposited the previous year.
“The economy is improving and interest rates are staying down – it has been a perfect storm for property,” said Mark Dampier, head of research for Hargreaves Lansdown.
Funds from Aviva, Henderson, Ignis and Aberdeen have all grown around 10% over the past 12 months, and Property was one of the top performing sectors last month.
While the fundamentals to support the sector remain in place, investors should remember 2008. In 2008, commercial property investors were unable to access their cash as several funds imposed exit restrictions. These open-ended funds – including offerings from Aviva and the now-defunct New Star - faced a deluge of sell requests as the property market crashed and investors wanted out.
For the long term investor property does have its value. In a closed-ended fund, as a small part of a portfolio it can provide a diversified source of income and in a thriving UK economy rental rises provide a hedge against inflation.
