Why property investment is a viable option for 2023

The property market has long been an important element of the UK economy. It has proved to be an excellent way to generate and accumulate wealth over the long term, either through personal investment property portfolios or as a component of one of the UK’s many institutional portfolios and pension funds.

Related topics:  Landlords,  Investment,  Investors
Andrew Ward | Solomon Investment Partners
7th February 2023
Andrew Ward 905
"Timescales are an important consideration because property investment has never been about making quick wins"

One of the main reasons is the market’s strong record of long-term capital growth and the reliability of rental demand. This has made it an attractive option for those looking to protect the real value of their savings against the erosive effects of inflation, while simultaneously earning income from regular monthly rental returns.

However, with 2023 predicted to be a challenging year and with talk of recession rife, there has been much discussion about the impact of affordability pressures. A continuing dip in house prices is expected, and there is already clear evidence of a slowdown in activity. So, is investing in property still a sensible choice?

Not doom and gloom

The current cost-of-living crisis, high inflation and falling real-term incomes are all likely to constrain consumer spending power and transaction rates in the housing market. However, it is extremely unlikely that house prices will fall by anything like the same margins seen in 2008/09.

Most house price indices reported small falls last month, although Rightmove registered a modest year-on-year increase. But these are very different conditions from those that prevailed before the global financial crisis. Now, affordability pressures are largely the result of temporary external factors, some of which – like the wholesale prices of energy and fuel – is already abating. Accordingly, inflation is moving in the right direction.

On 2nd February, Bank of England governor Andrew Bailey reported that “CPI inflation is expected to fall to around 4% towards the end of this year.” If it does, then it would alleviate pressure on household budgets and provide less justification for further increases in the base rate.

Moreover, average earnings have held relatively strong, and the banking system is much more tightly regulated than it was in 2008. In short, the UK market is in much better shape and, crucially, it is still characterised by strong rental growth and a pronounced surplus of demand over supply.

A pause before regrowth

Once cost-of-living pressures ease, the property market could well return to a more familiar pattern of capital and rental growth. And in the meantime, investors are facing a period during which initial purchase costs may remain static or even fall. Regarded in the context of longer-term trends, this means that 2023 could present an opportunity; a chance for investors to secure properties more cheaply than they would if house prices had continued on their steep upward trajectory.

Time and Location

Timescales are an important consideration because property investment has never been about making quick wins. Shorter-term peaks and troughs matter much less than the longer-term trend, and over many decades, property has shown steady growth.

Moreover, forecasts and national averages inevitably mask considerable local variation. Even in a market downturn, individual properties or developments can greatly outperform national averages. Likewise, certain towns and cities will inevitably fare better than others.

Looking ahead, the local markets with the greatest potential may well be those where average values never became so unaffordable in the first place. Since the pandemic, many less expensive locations have shown really strong rates of capital growth, together with excellent yields. Importantly, these same locations may also be better protected against any downturn. Cities like Liverpool, for example, have shown impressive growth in average values and less volatility overall. Prices started from a comparatively low base and although they have risen markedly – as a result of economic growth, substantial infrastructure spending and huge private sector investments – they are still well below national average values.

Liverpool isn’t unique, of course. Numerous British cities have fared well, particularly in Wales, northern England and parts of the Midlands. So too have some of the commuter belt towns outside big urban centres such as London, Birmingham and Manchester. Bolton is a great example; it benefits from convenient proximity to Manchester and Salford but properties here have been much more affordable than in the cities themselves. That has made them very attractive to buyers and investors. By the end of 2022, year-on-year price growth was averaging around +11% in Bolton.

Up-and-coming areas such as these can help property investors achieve much greater returns than any conventional savings account would likely deliver, even in an uncertain market. Property investment also often provides more predictable, and more rewarding returns than asset classes such as cryptocurrency or many stocks and shares.

The continuing appeal of property as an asset owes much to simple laws of supply and demand. Housebuilding rates continue to fall well below the government’s 300,000 annual targets, while demographic and socio-economic changes have pushed housing demand to record levels.

With a growing number of people looking to step onto the ladder, that demand is likely to continue in 2023 and beyond. As market conditions return towards more typical patterns, that excess demand should see property prices returning to their usual upward trends.

Despite the tax and regulatory changes that have deterred some small-scale landlords, property investment remains a very popular way for people to protect and build their wealth. What often stops them is simply not knowing how and where to start. But by talking to a good investment specialist, they can take those first steps with confidence.

A specialist will be ready to work with them to develop bespoke plans based on their circumstances and goals. They can then provide the necessary support to help them make the right decisions in what should continue to be a very rewarding market.

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