What Are the Generational Implications of the UK Housing Shortage?

Already strapped with education loans and lower wage expectations, the under-35 set of UK workers face difficult economic factors. More houses would help.

It is well understood in the UK that there are too few homes. Also, that this shortage has social and economic implications - for individuals and the country at large. But this housing shortage hits different demographics harder than others. Specifically, it’s the younger people and families who are put at the greatest disadvantage.

Unfortunately the inability of those under the age of 35 to get on the property ladder could affect them for years to come, possibly the rest of their lives. There is no certainty in such predictions, of course. A reordering of how homes are paid for and how many are built could alter the trajectory.

Policy makers and land development investors are working to solve this dilemma. The Government’s Help to Buy scheme, now in its third year, has stimulated progress; and the newer Starter Homes initiative, which provides a 20% discount on new-build homes on brownfield land, shows promise. From the private sector, strategic land partnerships help unlock and develop unused land for large-tract development. When land is made available for building, per local authority approvals, homes can be built by those partnerships where workers want and need to live.

But if these programmes and developments are thwarted, or fall short of their goals, the younger workers and their families could continue to suffer in several ways:

• Home prices will continue to rise steeply, as they did in the 1980s and the 2000s (up until 2008). The longer it takes for someone to buy their first home, the less likely it is they will ever be a homeowner.

• While about two-thirds of working people under age 35 owned their own homes as of 2004, the proportion dropped to just 36 per cent in 2014, according to the English Housing Survey.

• Forced into renting with a dearth of social housing available, working people in the 25- to 34-year-old age group rent from private landlords. In London, the average per-week rent is £281, about half the median take-home pay in that city.

• Wealth distribution is already poor in the UK, but that distribution is even greater in the housing category. The top 10 per cent own 100 times more than the bottom 10 per cent, according to a 2010 study (“Home-ownership and the distribution of personal wealth,” Joseph Rowntree Foundation/Housing Market Taskforce).

• Another indicator of the gap between the “haves” and the “have nots” is widening, is seen in outright ownership, itself probably a function of age / generation. Those owner-occupiers who have a mortgage number 6.9 million households while 7.4 households have no mortgage, either because theirs is paid off or they had enough cash to purchase without a bank loan.

• Homeownership is a primary means of saving for retirement. Particularly with equity release schemes, or outright selling a larger home to ease down to a smaller residence, the pensioner who owns his or her home has additional money that the renter lacks.

Economists project that if these trends continue, it can play out in poverty and social dependence decades down the road.

Social housing and housing subsidies play a role in that they can provide affordable rents while households save money for a first-home deposit. But the price of housing cannot stabilize or drop until the inventory of residences increase. Institutional investors (insurance companies, pension funds and the like) are drawn to housing as an investment, a hopeful sign that has stimulated increased activity among homebuilders. Property fund managers too are increasingly active, scouting locations and engaging with local planning authorities to release land for development.

Individuals who show interest in UK land investment, property development and other real estate ventures generally do so to realize asset growth. But the social consequences can be positive as well. No investor should embark on any programme before discussing it with an independent financial advisor first.

What Are Some of the Negative Impacts of the UK’s Housing Shortage?

The approximately one million households in Britain who wish to buy a home but cannot are adversely affected group. But in fact housing affects everything else.

It’s a well-understood fact that there is a serious housing shortage in the UK. For a generation, building has not kept pace with population growth, and the most critical impact is on rapidly rising costs of homes, both to buy and to rent.

This has several implications for the country and its citizens. For owners of homes, rising prices mean increased net wealth. For those who rent - younger people in particular - a point has been reached for many where owning their homes is not possible. For homebuilders and investors in residential development (such as managers of UK property funds who endeavour to identify land where homes can be built on a large scale), the opportunity to build and profit are strong.

But until supply catches up with demand, which may not happen for 10 to 15 or more years, this shortage will have an effect on the UK economy overall, most of it in a negative way:

• Individuals (most often young families) who are unable to muster a deposit and credit worthiness to buy a home are most likely to rent in the private sector. They clearly accumulate no equity from their monthly rent checks and are subject to rent increases that would not occur with owned property.

• Housing in the private rented sector dominates the rental market, with social housing much smaller than 30 years ago. The quality of private housing varies, but in 2014 more than 80,000 people went to the Citizens Advice Bureau (CAB) to report problems with their rental housing; reportedly, a third of houses in the rented sector fail the Government’s Decent Homes Standard. A frequent complaint is draughtiness in winter and high costs of heating. “Revenge evictions,” in retaliation for complaining about substandard conditions, affected 200,000 renters in 2014, according to the CAB.

• The “housing pinched” are those people for whom housing costs constitute half of their disposable income. According to the Resolution Foundation, this is 1.6 million households, about 63% of which have working members (7% are pensioner households and 30% are workless households of working age).

• The effect of so much working income going to housing is so little is left to spend on other goods. According to the Family Resources Survey conducted by the Office of National Statistics, 830,000 households have an average of just £60 per week left over after paying for accommodations. That means less expenditures are made on durable products, transportation, food, clothing, entertainment and other “discretionary” expenditures, including educational experiences for children. Shareholders in those sectors should think about housing as something that affects them.

• Wealth inequality is growing in the UK, and property ownership is no small part of that. Thomas Picketty’s seminal book on this subject, “Capital in the Twenty-First Century,” strongly argues that returns on property and other capital provides greater returns than natural economic growth, and therefore widens the divide between those who own and those who rent.

Of course, if you’re an investor in home building, you benefit from capital at while helping to alleviate the shortage of residences that makes ownership more accessible to more people. Real asset investing that turns raw UK land into homes has that net effect, even as the investor is able to experience relatively rapid asset growth.

No investor should embark upon property development or other asset growth strategies without guidance. Independent financial advisors can help assess the relative risks and rewards that make for a balanced portfolio.

To What Degree Do Foreign Investors Put Money into UK Housing?

Investors from Russia and China are buying English homes, but are proving to be buyers and not builders. A new tax may quell that - or simply change what they buy.

There is a reason that the British government closed a particularly maddening tax code loophole in early 2015. By imposing as much as a 28% capital gains tax (CGT) on foreign property owners, it levels the playing field (so to speak) between buyers in the UK who are residents and foreign investors, the latter of which have been snapping up huge numbers of residences as investments.

This is the UK, after all, where a housing shortage already has one million British residents waiting for a home and where homebuilding has woefully lagged demand for most of the 21st century. What has been happening is buyers from Russia, China, Singapore and the Middle East are snapping up flats the moment they are available for sale. It is an indicator on the high value of British property, to be sure, but when outsiders treat English homes as investment vehicles, not a place to live, it is cause for resistance. Parliament agreed.

It is also yet another indicator as to why investment is best for the country at the development level, not the home buying end. Investors from abroad as well as in the country have done well with capital growth land opportunities, turning unused UK land into homes. They are increasing supply, not demand, and as such they alleviate a vexing scenario for homebuyers of the kind who actually wish to inhabit the properties.

It is widely understood that foreign buyers, some of whom do spend holidays in their second residences, are largely concentrated in London’s tonier districts. But they’ve been buying properties outside the Capital City as well:

• Homes in South Wales, flats in Manchester, Liverpool and Sheffield, as well as cottages in Weston-Super-Mare were reportedly being sold on websites directed at Chinese and Russian investors (according to reporting in the Daily Mail in late 2014).

• Cheshire-based property firm Assetz says a third of its sales in August 2014 were to Chinese buyers.

• A spokesperson for Sequre Property Investment, which specialises in high-income producing buy-to-let properties in a number of UK cities, told the Daily Mail that foreign investors were “corrupting the market,” as evidenced in exceptional price hikes in two-bedroom Manchester flats.

Will the new CGT dampen down this activity - leaving more homes at affordable prices for middle-income buyers?

A London-based agent with the property firm Druce told The Wall Street Journal it would likely not affect his foreign customers who buy in such places as South Kensington and Chelsea. He said those buying at prices north of £2 million would not worry about the extra tax, that the stability of the UK economy overall still provides a safe haven for those from countries that include Russia and China. Another London-based agent thinks that it might shift investors from single, higher-cost properties to instead buy multiple, lower-price flats.

For managers of UK property funds who develop homes, this isn’t necessarily bad news. But the strong market for homes overall should be incentive enough to build. Their challenge is to achieve council approvals of land use changes, which is more likely to be achieved today than five years ago thanks to the National Planning Policy Framework instituted in 2013.

Investors in any type of real estate should have a broad understanding of the opportunities, risks and rewards. An independent financial advisor is best equipped to provide this with objectivity.

The State of Young Renters in 2015: What Are Their Prospects for Becoming Owners?

Current statistics suggest that fewer and fewer people in the middle class will own their homes, particularly among the young. But several forces defy that trend.

The numbers suggest a downward economic slide: real estate chain Countrywide predicts another 600,000 people will be renters and not owners by the year 2019. This is on top of the million UK residents - concentrated in the 25- to 34-year-old age group - who have become renters since 2010.

What’s going on is fairly easy to understand. As the UK population has grown in the 21st century, house building has failed to keep up. This supply shortage increases the cost of both ownership and renting. Compounding this was the financial crisis of 2008, which was followed by a tightening of credit on all borrowing. Younger workers were being paid less as the price of housing went up. Now with wages rising, the main challenge is mustering an adequate deposit – which more typically comes from the “bank of mum and dad” than what individuals are able to save.

So what do those with money to invest make of this? Is the best option to invest in REITs, which largely concentrate on the rented sector? To be a buy-to-let landlord? Or to join in a UK capital growth fund, which builds homes on scale for that sector of the market of people who can afford to buy?

There are indicators that, despite dim prognostications on the growing renter class, that building for homeowners is still a smart path for all concerned:

• Most people agree, within Government and among economists, that an ownership society is a more economically stable society. Brits who are on the property ladder will accumulate much more wealth over decades that will provide them a more comfortable retirement.

• Shelter, the housing charity, encourages building for all economic strata as it takes a general “rising tide raises all boats” perspective. What the organisation wants is more homes, period, such that those at the lowest levels can find affordable rents.

• Government initiatives that enable buying - Help to Buy, Right to Buy and Starter Homes schemes - have already proven or are likely to prove successful at stimulating both purchase access and increased homebuilding.

• There is a growing consensus that some greenfield and green belt lands might be swapped for brownfield property that would be more appropriately repurposed as urban greenspace (versus residential construction). With more land on the periphery of major cities dedicated to residences, it becomes possible to improve the quality of life nearest centres of work and commercial developments.

• Local planning authorities that are tasked with development goals from the National Planning Policy Framework (NPPF) are reaching for ways to collectively increase the nation’s housing stock, many of which are written with the input of property fund partners whose research show where people want most to locate their homes and where infrastructure will be most cost effective.

• London is no longer the only place to live: anet outflow of 22,000 people in their 30s happened in 2013-2014, a response to soaring house prices there and simply recognising that cities north, west and south have a good quality of living to offer (Birmingham is the favourite, followed by Bristol, Manchester, Nottingham and Oxford).

Investment capital into property generally follows these migrations, and consequently the healthier supply of homes in those cities means that they are becoming more affordable. Particularly in an information-driven economy, this cultural shift is much more likely over time.

Those interested in UK land investment and housing should speak first with an independent financial advisor who can analyse specific investments as well as the general balancing of risk in individual portfolios. There are many variables in real estate and housing investments and as such should they should be considered holistically.

Ten Factors that Favour an Increase in the UK Housing Inventory

Politicians of all stripes made housing promises in the May 2015 election. But what’s already in place or on the drawing boards is helping to add much-needed homes.

With the 2015 election now settled, many Government programmes and policies are a little more certain. The re-election of the incumbent Mr. Cameron suggests a likely continuation of many initiatives, including those affecting the supply of housing. This can be largely reassuring to homebuilding companies and investors, including those who get council approval to use raw UK land to build new homes – UK strategic land developers – and it should at least define the playing field for homebuyers.

In the immediate aftermath of the election, real estate company Savills predicted that prices of homes in prime central London will increase by 22.7% by 2020. The head of residential research also projected that prime properties outside of the capital will increase by a bit more, 23.9%. Lower-priced properties will likely rise more modestly, by 10.4% in London and 19.3% elsewhere.

High prices stimulate increased supply in classic economic theory, however the shortage of housing amidst high prices - unaffordable to many - have confounded theorists with regard to UK housing. It’s clear that inventories need to be increased, building 200,000+ new homes per year simply to meet existing demand; instead, far lower numbers (120,000-140,000 new building homes) have characterised the past decade.

That said, several factors suggest homebuilding will be on the increase, funded by housing associations, REITs, individuals, homebuilders and real asset fund managers. Following is a run-down of ten factors that will and can drive an increase in the number of homes being built - and perhaps which will challenge those price increase projections:

1. Employment - Not only are more people working in the UK today than since the financial crisis of 2008, but employment in Britain is rising at twice the rate as elsewhere in the Eurozone, including Germany. Work and Pensions Secretary Iain Duncan Smith announced in early 2015 that about 11,000 people are returning to work every week in the UK. Figures from Eurostat indicate that 30.8 million people across the continent have returned to work, taking employment throughout Europe to pre-recession levels.

2. Help to Buy - Buyers of homes up to £600,000 value can finance their purchase with just a 5% deposit, while the government will loan the buyer 20% of the value and a mortgage is necessary for the remaining 75%. Fees to the government for the 20% equity loan are not charged for the first five years of ownership. Propertywire.com reported in early 2015, about two years after the scheme’s introduction, that more than 77,000 homes have been purchased under the plan and that “as a result house building levels continue to climb.”

3. Right to Buy - This is the scheme that allows most council tenants to buy their council home. The purchase is at a discount. While it is focused on existing structures, it technically should contribute to new building as council homes are intended to be replaced when sold to private owners. This is a contentious issue, as social housing construction has lagged. The charity Shelter, which advocates for more affordable housing in all forms, notes that the waiting list for social homes has 1.8 million households, up 81% since 1997.

4. Starter Homes Initiative - Aimed to satisfy first-time buyers (under age 40) by eliminating the 20% portion of a new-build price associated with Section 106 affordable housing contributions, this programme involves the construction of quality homes (up to £500,000 value) mostly on brownfield (previous use) land. Much of this is in urban environments and thus makes use of existing infrastructure and does not encroach on greenfield/greenbelt lands.

5. Right to Acquire - Similar to Right to Buy, this enables housing association tenants to buy their homes at a discount (purchase from housing associations, councils, the armed services and NHS trusts and foundation trusts). Discounts range from £9,000 to £16,000, depending on local costs. While this funds purchases of existing structures, the housing associations theoretically (and practically) can use proceeds from those sales to build more, according to Work and Pensions Secretary Iain Duncan Smith.

6. Low interest rates - Political analysts say with the Conservatives’ victory in the May election that interest rates will remain low for longer. Those rates are at historic lows, such as ten-year fixed (<3%), five-year fixed (<2%), and three-year fixed (<2%). First-time buyers have more difficulty finding the standard 20-25% deposits, however the aforementioned programmes help with that when individual thrift or, more likely, the “Bank of Mum and Dad” are unable to assist.

7. NPPF - The National Planning Policy Framework is almost entirely about increasing the supply of housing that is affordable. It places mandates on local councils to establish growth plans, and more than half of the country’s local planning authorities have done so. This replaces a regional system that did unpopular top-down planning and which was bureaucratically unwieldy.

8. Right to Build - Aimed at self-builders and small homebuilding firms, this land release scheme provides access to council-owned land. Would-be builders can challenge local councils to release appropriate land, which also helps satisfy NPPF mandates. There are 11 local councils among a first wave offering Right to Build plots, using a pot of £550,000 to fund “suitable and serviced” plots of land. For example, Cherwell will receive £90,000 to expedite construction of 2,000 custom-build homes.

9. Greenbelt relaxation and adaptation - One of the most contentious issues around housing in the UK is to expand development into the many greenbelt lands surrounding most major cities. Alternatives are to build on urban disused land (brownfields) or to increase the reach of high rises. But the pressure to build out has many proponents and in fact more than 5,600 homes were constructed on these areas in 2013 alone. Some cities do greenbelt swaps, trading disused greenbelt land for urban brownfields, allowing houses on the periphery of the city and installing parkland in the urban core.

10. Greater London Authority interest free credit - Builders who construct affordable homes in the capital are eligible for no-cost credit. This programme is entirely designed to increase the stock of properties that are available to middle income workers. Investors clearly find it appealing because of the reduced development costs of interest-free loans.

What still looms is the slight chance a mansion tax will be imposed, which would affect prime properties valued at £2 million or more in London and the foreign investors who are largely blamed for price run-ups.

Investing in real estate in any form carries risk and reward. Speak with an independent financial advisor (IFA) to discuss what best fits your individual investment goals.

How Are the UK’s Homebuilders Faring in 2015?

After a rocky January, the first quarter of the year showed a rapid uptick in building. General election results also show that confidence in building is up.

Within hours of the close of the 2015 Conservative Party victory in May, UK homebuilder stocks jumped. The Bloomberg EMEA Home Builders index rose the most in five years, by 7.7%, with national firm Berkeley Group Holdings climbing by 14.4%.

Analysts say that is because a Cameron government wouldn’t impose a mansion tax or curbs on rent increases. It makes sense that properties that will net out better will therefore be more valuable. And this comes during what is already a strong quarter (Q1 2015) for homebuilding, which saw 40,281 new homes registered with the National House Building Council – the highest number since 2007 in the comparable quarter.

For investors and workers in the building sector - think strategic land partnerships, which turn empty land into housing developments - this is all good news. Not only is there strong demand for housing, which is well documented and considered to be a crisis - but other factors that drive the market seem to be working to make housing a smart investment.

Those factors are:

• Cameron’s commitment to housing - While the topic of affordable housing was much more in the ownership of the Labour Party, Mr. Cameron campaigned on keeping mortgage rates lower, building more affordable homes (including 200,000 starter homes for under-40 buyers), and new savings initiatives.

• Lending schemes to help buyers - The Government has increased its involvement in the housing market with a clear focus on making it easier for first time buyers to get on the property ladder. They are Help to Buy equity and mortgage guarantees; Help to Buy: Right to Build (specifically geared toward the release of council-owned land for private building); Right to Buy and Right to Acquire (aimed at council and housing association tenants); and the new Starter Home Initiative (elimination of Section 106 charges on homes built on brownfield sites). Notably, all provide stimulus to the homebuilding and construction industries. Further, Mr. Cameron proposed a Help to Buy Isa to encourage younger people to save for their deposits. The initiatives introduced in 2013 have already had a measurable effect within two years.

• Potential homebuyers are working - The UK is enjoying the best employment numbers in years, with a 5.6% unemployment rate for the three months ending in February 2015, as compared to 6.9% in the year-earlier comparable time frame.

It bears noting that with the Conservatives’ victory at the polls, housing price predictions are for a significant rise (10%-20%). This is largely due to foreign buyers’ interest in UK housing as an asset class, sometimes evidenced by unoccupied properties that are merely safe havens for investors from China, Russia, the Middle East and elsewhere. This directly affects higher-cost homes, but also those at lower price points as other buys are pushed down by the premium-price homes.

All of which should indicate the prospects for homebuilders and their investors (e.g., property fund managers) appear to be good. Demand is never a question, given how one million working adults in the UK do not currently have the ability to buy or even rent a home where needed. Investor funds that can bring land into property development can bring a trickle-down benefit to the rest of the market.

Investing in UK land is long considered to be among the smartest places to put money. But the market has many variables (e.g., the recently completed campaign season), which can affect the economics of a home purchase. Speak with an independent financial adviser to consider how to manage the unknowns.

Buy-To-Let Investors: How Are They Faring?

Profits from rental property can be enticing, and current interest in investment homes is up from 2009 levels. But investors should consider alternatives.

The boom-and-bust cycles of real estate investing have affected UK buy-to-let landlords over the past 15 years. So where do things stand in 2015?

With about 14.4% (Q3 2014) of all mortgage lending in the buy-to-let market, it is best characterized as a time of crossroads. While demand for housing is at an all-time high due to a growing population and lagging new home building, the investor interested in renting out residential property has several variables to consider, such as proposed rent caps that were discussed in the 2015 election (not immediately likely given Labour’s defeat, but some ideas resurface over time).

Investing in real assets is not for the faint at heart – it can get messy when dealing with physical properties and the vagaries of tenants who sometimes make poor decisions or who encounter personal financial difficulties. For someone new to real property investing, it might make more sense to invest in a UK joint venture land opportunity, where the involvement ends (and returns on the venture realised) within a few short years.

This is not to say that privately rented properties cannot make money. Indeed they can, just as most investments in real property can be profitable in a country where an estimated one million households await housing and the population is growing. But there are several factors that make buy-to-let a tricky equation:

Property repair costs - Annually, the costs for repairs, refurbishment, cleaning, decoration and exterior maintenance can add up to £1233 per property, according to a February 2015 study by Platinum Property Partners, a specialty firm in the buy-to-let business.

Administrative costs - The same study showed that letting agent management, finder fees, maintenance fees, service charges, mortgage interest (for those who do not own their properties outright), advertising fees to let and miscellaneous costs add up to $6,621 some years. This does not include “void” periods between old and new tenants, which is when repairs and repainting are done.

Threats to cap rental increases - It was a hot political topic in the 2015 election as to what restrictions can be placed on landlords, largely focused on capping rental rate increases and guaranteeing tenancies of up to three years while creating barriers to removing antisocial tenants (so-called “revenge evictions”). Again, these ideas could be brought back.

Required immigration checks - Already, landlords in five council areas (Birmingham, Walsall, Sandwell, Dudley and Wolverhampton) are required under threat of a £3,000 fine to conduct immigration background checks, asking for passports or residence permits (and knowing how to identify fraudulent documents). Resistant landlords complained to the Telegraph that this is an unnecessary burden and it should be the province of immigration control.

As mentioned, other ways of investing are not subject to these particular concerns. With REITs, the liquidity of buying and selling shares under normal income taxation rules is perhaps the polar opposite option. Investors who work with land fund managers might put their assets into a partnership that buys raw land, gets council use permission to build, then makes money in a short term turnaround (1.5 to 5 years). The building and selling of homes to buyers of course serves a different market than renters.

Investments in any form of real property carry the hope of high returns - and yet risk is inherent as well. Contact an independent financial advisor to learn how the different options stack up in relation to your own financial planning strategies.