It is said an Englishman’s home is his castle but there can be little doubt that, just as bonds are now viewed as an essential and readily accessible asset class, residential property is increasingly seen as an investment.
This is borne out by the rise in rented accommodation as a proportion of the housing stock, driven in no small measure by the difficulty many find in entering the property market. Houses have rewarded those who own them well but can they continue to outperform other asset classes?
Two recent reports on residential property arrive at contrasting views on what may happen in the future, although, in fairness, they are looking at this area from different perspectives.
One examines the need for more investment in housing, in particular in the private rental sector, and the other is concerned with whether or not a housing bubble in the West will continue to deflate.
The report into house price bubble deflation by a leading economic consultancy makes for some uncomfortable reading.
A historical perspective is adopted and comparisons are made between various countries. Leaving aside Japan – a graph is used to show that what has happened to residential land prices over the past 40 years demonstrates just how big a collapse has taken place there – it is clear that the 15 years to 2008 were an exceptionally good period for house prices. Life has been tougher since then.
However, only the US seems to have seen values fall to the extent that prices are now below their long-term trend. Interestingly, Germany looks to be the only major economy that has not seen a significant house price bubble. We all know what has happened in Spain and Ireland. The question is what is likely to take place in the UK?
The survey looks back over 800 years to show that residential property should return a real 0.5 to 1 per cent a year on average, dependent on the country and time period adopted. With even such a narrow band of returns, future outcomes are difficult to judge. Spain, for example, could be within 10 per cent of appropriate adjustment or might have to suffer a further near-50 per cent fall. Nothing like hedging your bets. Returning to the report on rented accommodation, prepared by leading estate agent Savills and property website Rightmove, part of its conclusion is based on the expectation that residential housing should deliver a 7 per cent gross return over the next decade, according to Savills’ own forecasts.
Of course, we are a small country with finite building room, which has suffered a massive downturn in new building over recent years. But its overall bullish forecast clashes with the historically based assessment of further to fall.
Whichever turns out to be more accurate, I rather suspect that the easy money in residential property has been made. Likely demand suggests an investment of £200bn in the private rented sector will be needed over the next five years, of which only a quarter might reasonably be expected to come from buy-to-let private landlords. With the Government and local authorities still shy of re-entering this market, this suggests institutions may have a role to play.
To return to the bigger picture, it seems that the private rented sector, worth some £840bn at the end of 2011, accounts for close to 20 per cent of the housing stock in this country. This suggests the total market is worth more than £4trn. The CISI report I referred to recently suggested sovereign wealth funds the world over amounted to only a little more. We ignore what happens to house prices in this country at our peril.
Brian Tora is an associate with investment managers JM Finn & Co