Commercial Insurance Articles

UK Commercial and Residential Property Market Outlook

14 Dec 2006

If you thought the only people still investing in property were those either making reality TV shows or starting a new life in Provence, think again. The UK commercial property market is currently the most dominant investment market in Europe, and it looks likely to stay that way for the foreseeable future at least.

That's the verdict of a new report published by property consultants DTZ, who say that the commercial market continues to attract core investors, with capital inflows reaching £69.5 billion in 2005 alone – a rise of £46.9 billion over the previous year.

As the Bank of England raised interest rates to 4.75% early in August, however, and then to 5% in November, a downturn in the residential market seemed to be on the cards. When it came, though, that downturn didn't last: although house prices dropped during the summer, and appeared to have stagnated, by the end of the year they were back on the rise. And while consumer spending in general has reduced, with economists and retailers alike expressing concern over how the high street will cope this Christmas, there are no such fears about the fate of the property market – or not yet, anyway.

Rising tax, ever-increasing fuel and utility bills, combined with record levels of personal debt and a creeping rise in unemployment means that we have less disposable income than ever before.  But what does all of this mean for the UK property market? Not very much, according to the country's largest house builder.  Persimmon Homes announced a 16% rise in half-year profits this August, and claimed to have seen "no tangible effect" from the quarter percent rise in interest rates the same month. In fact, executive chairman, John White said the rising costs of home ownership, and of life in general, aren't putting their buyers off.

"For the majority of our homebuyers, decisions to move are driven primarily by their family dynamics and, therefore, we expect this healthy market to be sustainable," he commented.

The second interest rate hike, in November, also appears to have had little impact on prices: in fact, according to Nationwide Building Society, UK house prices rose at their fastest pace so far in November, with the average house costing £172,185 – a rise of 1.4%. According to the Bank of England, the number of mortgage approvals that month was the highest it had been in three years – a further indication that although consumer confidence is low, the property market appears to be picking up after the summer slump.

Back in the summer, predictions were being made that house prices had peaked for the year. July saw a 1.6% drop in average prices, but it now seems apparent that this blip was caused by a mini boom in the South of England earlier in the year. Indeed, the Council of Mortgage Lenders' (CML) report on the housing market states:

"The housing market appears to have gained momentum since the summer despite the rise in interest rates in August. Demand for housing remains robust and the month-to-month changes in the various house price measures have picked up in recent months, pushing up annual rates towards 10%."

While this is good news for sellers, of course, it creates a gloomy outlook for buyers. "Rising house prices are not necessarily a good thing," says former Bank of England economist, Tom Vosa. "The risk is that at some stage the value of the housing stock falls precipitously because there are no buyers left."

The lack of buyers is certainly proving a problem in the first-time buyer market, where prospective home owners are being forced to enter into property partnerships with strangers purely to get a foot on the property ladder. With London prices in particular far more than a single salary can support, such is the severity of the problem that websites such as sharedspaces.co.uk have sprung up to help first time buyers find "property partners" or "mortgage mates".

The idea behind such schemes is a simple one: it takes most first-time buyers around five years to save up the deposit for a house, and even then, their single salary may not be enough to get them a mortgage. By teaming up with a mortgage mate, such buyers can increase their spending power and finally own a home of their own. For many, it's their last chance of becoming a home owner, and even this month's decreasing prices doesn't make it any more likely that they'll be able to go it alone. The increasing popularity of buy to let mortgages – for those who can afford them – also means that the rental market benefits as first time buyers are prevented from making a purchase.

As house prices rise, so too does the number of people holding money in property. It's estimated that Britain's millionaire population will reach 1.7 million by 2020 – more than four times the current figure. A large number of those new millionaires are likely to hold their wealth in property, with the rising prices leading to greater rewards. And although the housing market wavered this summer, property experts are still predicting a 71% increase over the next 15 years.

With mortgage repayments accounting for less and less of our disposable income, and growing returns from shares and investments, the 376,000 millionaires currently resident in Great Britain are expected to rise to 1.7 million by 2020. That number is down from the 1.9 million originally predicted two years ago, however, with slower than expected growth in the property market causing the number to be revised downwards.