Multi-assetOct 2 2013

UK housing market sees improvement

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Recent data on the health of the UK housing market appears to confirm that the improving trend has taken root.

Not only is the average home price rising, but importantly the trend is being seen nationwide rather than being focused on the South East, as had previously been the case.

According to the Halifax, house prices rose by the most in almost three years in July. A recent RICs survey also points to a reasonable outlook for the rest of the year, with surveyors increasingly optimistic about prices as well as buyer numbers.

The change in fortune can be attributed mainly to lower mortgage rates, as well as government intervention and an arguably tight supply of housing.

As with any market, confidence has also played an important role; as momentum has gradually built, would-be buyers and sellers become more confident which has led them to enter the market.

In a country where property tends to be the most significant of a household’s assets, this has important knock-on effects for the wider economy.

The implicit rise in wealth means that home owners feel better off, and as such, are likely to have a greater propensity to spend.

In an economy which is still very consumer orientated, this brings a boost to growth. For those who have been able to refinance mortgages, they will also have higher disposable income.

Government intervention in the form of ‘Help to Buy’ and ‘Funding for Lending’ are a mixed blessing, and it is debatable whether the former was really necessary.

Certainly in the short term they have helped, but in the longer term, government intervention in any market is to be avoided given that political motivations tend to prevail over fundamental ones.

The likelihood of a 2015 general election means that this may well be the case for these policies. The government will no doubt be keen to fight the election with a strong economic back drop and a robust property market, and as such there is the concern that these policies stay in place for longer than is required.

At the annual Jackson Hole Economic Policy Conference recently, the Bank of England deputy governor Charlie Bean appeared relaxed when questioned about the possibility of a new housing bubble, stating that at this stage there were no signs of this.

The dilemma of course is that with the central bank still aiming to keep interest rates low the chances of a bubble increase.

At this point, given the extremely low mortgage rates, house affordability is certainly not stretched and as such, talk of a bubble would seem misplaced.

Clearly rising house prices are both desirable and necessary for the economy.

The key will be that politicians and central bankers monitor developments extremely closely, as the last thing that the country needs is a return to the debt fuelled speculation that helped to cause the last crisis.

Daniel Williamson is head of Bristol discretionary at Rowan Dartington

Overview: Confidence rising in property sector

Property and absolute return on Berry’s watchlist

Berry Asset Management is looking to increase its exposure to assets such as property and absolute return strategies as a reduction in quantitative easing nears.

Is this just another bubble?

Investment Adviser’s research into the top holdings of 10 UK mid-cap funds found between them they invest in 22 property-related firms. Of these firms, 20 have posted share-price gains of more than 25 per cent in 2013 alone.

Examples held by several managers, including both Mr Watts and Mr Spencer, include Ashtead Group, a provider of heavy-duty construction equipment, which has gained 42 per cent so far this year; and kitchen-maker Howden Joinery, which is up 51 per cent. But there are increasing signs that the recovery may have run its course and it may be time for the likes of Mr Spencer and Mr Watts to cash in.

Mortgage lending rises to five-year high of £14.8bn

The Council of Mortgage Lenders’ latest monthly estimate showed that lending has reached levels not seen since October 2008, when the figure stood at £18.6bn.

Time to invest

According to Simon Kinnie, head of real estate forecasting at Scottish Widows Investment Partnership, there remains several hurdles to large-scale institutional investment in the asset class:

There is a lack of a suitable investment stock. Most residential developments are built for stock rather than built for rental. Developers can rarely be persuaded to sell a development in its entirety before completion since the returns available through individual sales are so high in London and the South East. A solution is build to let but this is capital intensive and units cannot be sold in phases during development to release capital

There is also limited liquidity. Trading of large-sized blocks of rental properties happens very infrequently. Where rental properties come on to the market these are normally from small buy to let investor portfolios that are not suitable for institutional investors

The asset class is relatively low yielding and this is exacerbated by high management charges. The current income yield from residential property is roughly 6 per cent on a gross basis (excluding Central London) and this falls to 4 per cent on a net basis after adjusting for the high costs of management charges