Dropping UK house prices won’t dent our confidence in buy-to-let

As property prices drop for the first time in years, why are we still in love with property?

The stock market may far outstrip the performance of bricks and mortar, but we don't seem to notice (Getty)

They have weathered tax hits and economic turmoil but this week, finally, the resilient UK property market cracked. If only slightly.

Prices nationwide fell by 0.2 per cent in the last three months, according to the leading measure of values the Halifax House Price Index – the first time it has dipped since the end of 2012.

It means property price growth over 12 months remains stagnant at 3.8 per cent, says Halifax housing economist Martin Ellis.

“Housing demand appears to have been curbed in recent months, due to the deterioration in housing affordability,” he explains, caused by a sustained period of rapid house price growth during 2014-16.

“Signs of a decline in the pace of job creation, and the beginnings of a squeeze on households’ finances as a result of increasing inflation, may also be constraining the demand for homes.”

That said, rock-bottom mortgage rates and the ongoing property shortage are expected to continue to prop up the market, and our love affair with all things bricks and mortar shows no sign of waning.

“Mortgage lenders continue to offer rock-bottom rates with HSBC’s lowest ever five-year fix at 1.69 per cent, which was launched last week,” says Jonathan Harris, director of mortgage broker Anderson Harris.

“The issue for buyers is affordability and bridging the huge gulf between incomes and house prices. There is changing sentiment; the best in class properties are shifting, but we are seeing a number of down valuations from surveyors as caution starts to become more prevalent.

“Vendors are beginning to appreciate that their homes aren’t worth as much as they thought, so we are seeing price drops in some areas. This is ultimately better for everyone as people who need to sell will be able to, and those who want to buy will also be able to, resulting in a higher number of transactions and better fluidity in the market.”

Jeremy Leaf, north London estate agent and former RICS residential chairman, adds: “We are quite encouraged that the annual level is still above where it was this time last year, bearing in mind the huge increase in demand ahead of the introduction of the 3 per cent stamp duty surcharge last April.”

“Looking forward, we are finding the market to be relatively balanced between supply and demand, and still expect those people who recognise current market conditions to take advantage.

“The market does seem to be finding a new, slightly lower, level and we are certainly seeing no signs of a more substantial fall.”

That’s despite the Government’s best efforts to take the property power from landlords accused of driving up prices and, ultimately, social inequality, by inflicting a series of tax increases and allowance cuts on them.

Indeed, Brits are three times more likely to invest in property than in the stock market. But in doing so have missed out on far greater returns, according to Fidelity International.

“When asked ‘property or portfolio?’, UK adults overwhelmingly chose to invest in buy-to-let property, despite a raft of additional tax hikes for landlords and the fact that the UK’s blue chip index, the FTSE 100 rose by 19.7 per cent in the last year ompared with just 3.5 per cent for UK house prices,” says Maike Currie, investment director for personal investing at Fidelity International.

“Investing in property has historically been dubbed as a ‘safe as houses’ option but in recent years the UK stock market has far outpaced the buoyant property market.

“While past performance is no guarantee of the future, [this week’s] data showing house prices have fallen causes concern that the property market is being pressurised by stretched house prices compared to our earnings.

“Other factors likely to weigh on the property market include rising inflation and stagnant wage growth. If inflation sees the Bank of England push up its base rate, the psychological impact on the property market could be significant.”

In the meantime, the latest data suggest those attempts to prevent property investment fuelling social inequality are failing.

The total value of residential house purchases in the UK reached £261bn in 2016, according to new figures from the Intermediary Mortgage Lenders Association (IMLA).

Around £152bn was provided by mortgage finance – up by £6.8bn in a year - and £109bn was made up of cash funds including the proceeds of existing property sales – up by almost £20bn over the same period.

The growing influence of cash in the house purchase market has, it warns, potentially negative implications for aspiring homeowners and home-movers who cannot stump up enough funds to add to a mortgage which their salary can support in order to afford a property purchase.

Peter Williams, Executive Director of IMLA, says: “Rising house prices and stagnant incomes mean that access to wealth as well as mortgage finance will increasingly separate the ‘haves’ from the ‘have nots’ in the property market if the importance of cash continues to grow.”