When did people stop buying houses to live in?

While it may seem strange to ask the above question, there is a growing feeling that real estate investors are now dominating the property market at the expense of homeowners. If we take a look at the UK market in particular it is evident from many regional markets that property prices have pushed too far too quickly for the domestic buyer. This has led to a significant shift in the structure of the UK housing market which does seem to have changed forever.

We will now take a look at some of the elements which are changing, have changed and will almost certainly change in the future.

Income to value ratios

While it would be wrong to suggest that income to value ratios in the UK housing market have reached anywhere near historic highs, there is no doubt that they are moving away from the general public. We are now looking at some properties now changing hands for in excess of five times annual income which is stretching the viability of such loans and leaving properties at the beck and call of investors as opposed to domestic buyers.

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Government after government can attempt to influence the UK housing market, they can curb mortgage arrangements and they can threaten fines and censorship unless financial institutions toe the line. However, despite all this, the fact remains that there are billions upon billions of dollars of real estate investment funds looking for the right home. These investment funds, and individual investors, often have cash available immediately without having to take on potentially expensive loans.

Rental market picking up

The UK rental market differs from area to area with some properties in London changing hands for a rental yield of below 3%. There are other areas of the UK where rental yields are 10% and above and while rental arrangements are often convenient for tenants in the short-term, they are starting to have a major long-term impact upon the UK housing market. With yields of between 3% and 10% available in the UK property market, and UK base rates rock bottom, it is a no-brainer for those with funds on account to lock into these yields. However, each purchase for the buy to let or the corporate real estate market pushes prices higher and higher and further out of the reach of the domestic buyer.

This then creates a vicious circle with individuals, partners and families unable to buy properties outright and therefore pushed towards the rental market. Again, more demand for rental property ensures more investors enter the market with competition for individual properties pushing prices higher. There has been and continues to be a serious lack of available affordable housing in the UK which adds to the vicious circle pushing more people down the rental route.

Pension fund investments

It is also worth noting that more and more people in the UK, and across the world, are now looking to acquire real estate assets in their pension funds. These offer potential long-term capital growth although unfortunately, due to UK pension fund rules, the pension fund recipient is not able to live in the pension fund owned property. This means that all pension fund real estate assets have to be rented out to unconnected third parties at local market rates.

The long-term nature of pension fund investments also ensures that many of these properties very rarely change hands because they are seen as “cash cows” bringing in attractive rental income and potential long-term capital gain. The capital gain on assets held within a pension fund is free of capital gains tax under normal circumstances which is another incentive to hold them longer term. Indeed many pension fund investors would rather acquire more properties as the years go by to not only build up their income but also build up their property portfolio.

Conclusion

In what has become something of a vicious circle it is now evident in the UK, and other parts of the world, that property prices have moved out of the reach of the general public. In a situation which aggravates the lack of affordable housing, more and more people are pushed toward rental properties because they cannot afford to buy a property outright. This then creates more competition in the buy to let market, attracts more investors and in many cases has been seen to push prices higher and higher.

At this moment in time it is difficult to see how the UK property market will change in the short to medium term to expand the amount affordable housing. We have housing arrangements, we have shared ownership and other similar deals but these are only short-term sticking plasters covering a very long-term problem.