Investors see property as a more favourable option

Monday 11th February 2013

The climate is looking more favourable for property investment in the UK with many viewing now as a great time to add to their property portfolios.

There are a number of reasons to consider investing in property, including attractively low mortgage borrowing rates, high rental yields, a major housing shortage, low bank saving rates, among many others.

The typical UK home is now worth £162,245, following an average rise of 5% in January, according to Nationwide.

Although activity in the housing market remains low by historic standards, there have been tentative signs of a pick-up in activity in recent months, thanks in part to greater mortgage availability.

“The Funding for Lending Scheme has achieved some success in bringing down mortgage rates, with some signs of a pick-up in lending activity,” said Robert Gardner, Nationwide's chief economist.

Mortgage approvals at four-year high

Mortgage approvals hit a four year high in January thanks to a combination of falling mortgage rates, a wider range of mortgages available to borrowers, and an improvement in lender confidence, according to detailed research released this morning by e.surv chartered surveyors.

e.surv’s latest Mortgage Monitor reveals mortgage approvals climbed 17% from 55,785 in December to 65,184 in January, making it the strongest month for house purchase lending since February 2008 – before the financial crisis. It also marked a 13% improvement on January last year. It is the strongest indication yet that the mortgage market is beginning to recover and regain some of its pre-2008 health.

The improvement in lending was driven by high LTV borrowers and first-time buyers, who accounted for the biggest overall share of the increase.

There were 7,758 loans to borrowers with a deposit of 15% or lower in January; the highest since February 2008.

Impact of Funding for Lending

Falling rates and a wider range of mortgages for first-time buyers were the catalyst for the improvement in January. Over the winter a number of major lenders launched their cheapest ever fixed rate mortgages, which quashed mortgages rates on two-year fixed deals down from 4.44% to 3.92%. The cheaper funds delivered to lenders’ balance sheets by the Bank of England’s Funding for Lending Scheme was the root cause of the improvement in lending conditions. Since FLS launched, lenders have introduced more than 300 new house purchase mortgages.

The improvement in first-time buyer numbers is reflected in a sharp increase in the number of purchase loans on cheapest properties. There were 14,995 loans on properties worth less than £125,000 in January (a typical first-time buyer property), the highest since February 2008, and a 28% increase from 11,714 in December. The number of loans on more expensive property increased at a much slower rate, illustrating how the improvement in lending in January was focused mainly on first-time buyers.

Richard Sexton, business development director of e.surv chartered surveyors, explains: “These are the most encouraging signs for the mortgage market since the financial crisis. After an inauspicious start last autumn, Funding for Lending has come good. It has flooded lenders’ balance sheets with cheaper funds, which has encouraged them to reduce mortgage rates to record lows and roll out a much wider range of mortgages for high loan-to-value borrowers. It is helping clear the logjam in the first-time buyer market.

First-time buyers

The recent rise first time buyer activity is welcome news, especially for vendors, including investors seeking to dispose of housing stock.

First time buyers were central to the strong overall growth seen in January – making up one third of the total valuations market for the first time since June, according to John Bagshaw, Corporate Services Director of Connells Survey & Valuation.

Bagshaw reports that valuations on behalf of first time buyers grew by 24% from December. In a fifth month of annual growth, there were 40% more new buyers than in January 2012.

He said: “A succession of months like January could start to feel like a sustained recovery for anyone hoping to buy their first home. A combination of strong buyer demand and improving competition among lenders at the bottom of the market has been central to progress. It’s also encouraging that we’re seeing lenders innovate with new products to try and unlock the first time buyer market.”

Lack of homes for sale

Despite the recent increase in demand from homebuyers, there remains a fundamental shortage of homes for sale, partly because of the lack of new homes being developed.

Recent figures released by the NHBC indicate that the overall level of house building declined last year with 104,510 new homes registered during 2012; a 9% decrease on 2011 (114,930).

“With housebuilding volumes so far below the numbers desperately needed in the UK, this is clearly an issue that needs to remain at the heart of Government policy,” said NHBC commercial director Richard Tamayo.

Government-backed schemes such as NewBuy and Funding for Lending should continue to help increase mortgage availability, boosting demand for new homes in the process.

But unless the supply of new homes rises significantly this year, the supply-demand imbalance in this country is likely to rise further, pushing property prices higher in the process.

High rental yields

Aside from strong prospects for capital growth across many parts of the country, investors are also prospering from extremely healthy rental returns.

One in ten of all residential properties in the UK which are rented out are now achieving gross rental yields of at least 10%, whilst the average yield is 6.2%, which is considerably higher than any bank saving rate currently on offer, according to the recently released Countrywide 2012 Lettings Index.

Rents across many parts of the UK increased last year on the back of the rise in demand. For the second consecutive year the number of new tenants registering for private rented accommodation increased by 25%, with more than 340,000 new tenants signing up to let a property in 2012, up from more than 275,000 in 2011.

Nick Dunning, group commercial director at Countrywide, said: “This time last year, ‘Generation Rent’, was a growing phenomenon but it appears that it's now here to stay, for the foreseeable future anyway. More people are renting because they cannot get on the housing ladder without the help of the bank of Mum and Dad. As a result, they have to rent for longer while saving for a deposit.”

He added: “The availability of more competitive buy-to-let mortgage products, along with fantastic yields, is creating a good opportunity for investor landlords to expand their portfolios to match the high demand for rental accommodation, as renting for longer is becoming the new norm.”

High rental returns and a general expectancy from various experts that property prices will increase moving forward, illustrate just why it is that so many people are actively buying property in the UK, with the number of national and international investors turning to the UK property market set to rise even further.


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