- Can we rely on our home equity as a source of financial security in later life?
- Should I sell my buy to let?
- Should we still be encouraging our children to buy into the UK property market?
These are questions we get regularly asked.
Buying property has long been considered a lower risk way of investing money. Those who did it, particularly leveraged up with a mortgage, have made fantastic returns over the last 50 years.
But there are signs those returns are slowing down and, in some cases, turning to losses.
Our short-term view
This month, the Guardian published the following headline:
“UK house prices fall by most in more than two years
Increase in stamp duty has helped weaken demand, as average price drops by 0.8% in June, says Nationwide”
House prices in many areas of the UK are falling in absolute terms, transactions are low, mortgage rates are not coming down as fast as expected – commentators (mostly estate agents 😊) are saying it’s a buyer’s market.
We should not be surprised. There are a number of factors cooling the UK housing marketing – among them:
- Stretched affordability, particularly amongst domestic first-time buyers
- Higher mortgage costs
- Tighter mortgage lending criteria
- A relatively strong pound for foreign investors
- Increased regulations for private landlords
- Worsening tax treatment of second homes
- Increases in maintenance and refurbishment costs
In a 2022 government survey, 2.1million households in the UK reported owning more than one property. 60% of those houses were in the UK with ownership greatest in the 55-65 age group. These households will need to offload more than a million second homes in the next two decades to avoid substantial inheritance tax.
Of course, the UK property market is very diverse. Specific regions, property types, and sectors of the market are behaving differently. In general, it appears low-cost housing is doing better than high value housing, and houses better than flats. The biggest price reductions appear to be in London flats and London’s super prime locations. In both cases there is anecdotal evidence of price reductions of as much as 20%. Prices are still rising relatively strongly where housing is more affordable, for example in Northern Ireland.
Recent years
The chart below maps UK house price changes versus CPI in the previous 5 years, using data from ONS and the Halifax – it feels sensible.
The spike in inflation has not been matched by a spike in house prices; house price rises have been falling since 2021 and inflation rose strongly in 2022 and 2023, so UK house prices in general have been falling in real terms (after inflation). 2025 looks like it might be the fourth year in a row this has happened and generally UK house prices may have dropped in real terms by around 10% in the last three years.
Chart 1
The last 50 years
I found this chart on the aptly named Housepricecrash.co.uk site which, again, feels reasonably accurate. It highlights both the long-term trend of house prices growing at 2.3% per year above inflation and the big real downward adjustments after the financial crisis of 2008/9 (and then again from 2022 as per the chart above).
Chart 2
For those who can’t remember the post 1989 house price crash, it was vicious. Many householders got trapped into negative equity, with their home values worth less than the mortgages they owed – they had to write a cheque in order to move, and it took around 7 years for prices to start to rise again.
Of course, those who toughed it out (or were able to take advantage of the drops in prices) went on to make substantial gains in real terms. House prices more than doubled in real terms in the 10 years between 1995 and 2005.
This chart suggests general house prices in the UK peaked in real terms just before the Great Financial Crisis (GFC) of 2008/9. Whilst there have been pockets of recovery (2012 -2016 being the strongest), in real terms general house prices today are 25% lower than in 2007 – although for those now stepping on to the housing ladder it certainly won’t feel like it.
Interestingly, the UK stock market has done slightly worse than UK residential property – it’s around 30% lower in real terms than in 2007, but performing quite well of late.
By contrast, the MSCI world index is up some 200% after inflation since the end of 2007, thanks largely to the boom in US tech stocks, but cooling off lately as the US dollar weakens.
Will property prices rise again soon?
A simplistic view of Chart 2 might suggest property values are getting attractive again, falling below the long-term trend line. Are we about to see a boom decade like 1995 to 2005? The big assumption here is that a 2.3% per year real return trend, highlighted in red in this chart, continues. It might not.
The most positive factor for house prices in the future is the chronic house shortage in the UK. In an article on Bloomberg last year an analysts wrote:
“Britain’s housing crisis has become so acute that the next Government will need to build the equivalent of another city the size of London to make up for 5 decades of below target construction.”
This will likely support the supply and demand of houses, although more at the affordable housing level than at the higher value end.
Of the more negative factors, affordability remains stretched:
- 5-year fixed rate mortgages have come down to 4%, but are stuck there and might not come down much further
- criteria for mortgages are relatively tight right now
- real wages (after inflation) are stagnant, with ‘stealth taxes’ (no increases in tax brackets) lowering after tax wages in real terms.
Affordability will be getting better as wages increase with inflation, assuming house values stay flat, but the ratio of prices to earnings for new home buyers were heavily stretched by the end of the low-rate mortgage era. Based on the Economics Help chart below, this looks like a bigger problem for London and the South East than the rest of the country.
Chart 3
Affordability needs to adjust substantially before we expect to see another significant upswing in prices. This could happen either through further house price falls, increases in wages relative to house prices, or a combination of both.
Even then, we won’t see a repeat of the 1995 – 2005 boom, which occurred as mortgage costs fell, tax rates fell, and which started with prices at an exceptionally low multiple to incomes, providing much greater affordability than we have today and are likely to ever see again.
The drivers for big house price increases looking forwards don’t appear to be there and there must be risk to further down turns. It does not look like a good time to be overexposed to the UK housing market. The red trend line may have been the best fit line for the last 50 years, but the next 50 years’ trend may turn out quite differently.
What should we invest in instead of property?
For owner occupiers buying with and repaying a mortgage over time, buying a house is likely still to work as a decent way to save money.
Paying down a mortgage costing 4% (say 1% above average inflation), is equivalent to a 6.66% p.a. return after tax for a 40% income taxpayer. If the house price goes up at all over the long term, the leverage provided by the mortgage will increase the equity in the property over time at rate better than inflation, and it remains a tax-free gain!
But for those buying property purely as an investment, the economics don’t look that great. Without a corporate structure mortgage, interest is no longer offsetable against rents for tax calculations, and any gains in value will attract 24% capital gains tax or 25% corporation tax if held in a company.
UK fixed income funds now offer an alternative low risk way to invest to generate a real return above inflation with a high degree of certainty and without the associated risks of the stock market.
Such investments have significant advantages over property:
- They are liquid and can be sold to cash in a few days, in part or in full
- They can be held in tax free wrappers like ISAs
- Returns are more predictable than the outlook for property
- The fees for investing are substantially lower than maintenance and annual running costs on properties
- They require minimal effort on behalf of the investor, other than a conversation with an adviser occasionally
Just as it is getting harder to make good real returns above inflation from investing in houses, it is getting easier to deliver those real returns from fixed income, without the risks associated with equity markets.
Summary
- Good quality housing will no doubt continue to bring security to owner occupiers and buying with a low-cost mortgage will remain a good long-term saving vehicle protecting money against inflation. However, putting all your financial resources into property is unlikely to make you rich in the next few decades, as it did in the last 50 years.
- There is much less urgency to get onto the property ladder.
- The age of the amateur buy-to-let landlord is probably behind us. Residential property investors will need a corporate structure and a more professional approach in specific sectors to make good returns.
- As we get into later life, we need to be realistic about the value we might be able to realise by trading down to release equity and from longer term buy-to-let holdings that need to be liquidated.
- Later life investors, investing without leverage, are likely to get better, more liquid, lower effort, low risk returns from UK fixed income markets than from UK residential property.
What next?
If you would like to chat through any of the contents of this article, or are considering either buying or selling property yourself and would like to discuss an alternative view, we are more than happy to help.
Get in touch with us on 020 3143 6100 or info@tidewaywealth.co.uk and one of our advisers will be in touch to arrange a no-obligation conversation.
To read more on this topic, visit our previous article.
