Here are the fundamental metrics that I’m using to guide my investment strategy and capital allocation.
A lot of forecasters (guessers – just like me) here are expecting a downward price pressure on housing but I will say this:
INFLATION IN 2024:
Inflation is down from 10% to less than 4% in the UK.
The Federal Reserve (FED) in the US are already intimating that they will start to cut base rates before reaching their 2% inflation targets.
I think we will see the same thing here in the UK sometime in Q1-2024 from the Bank of England
INTEREST RATES IN 2024:
With interest rates expected to drop to c.4.5% (versus 6% at present) I will expect this rate drop to have a inflationary impact on property prices as well as asset prices.
Government bonds will also be trending downward. this means that investors will move money away from these type of financial products and invest in real assets, such as the housing market as well as the equities market.
NET MIGRATION IN 2022-23:
Even with the “stop the boat” nonsense (who love a 3 word jingle!) that this Government has been spouting for the past year or so, which is quite just soundbite as its an impossible policy to deliver, net migration was up a mind boggling 700,000 last year (Dec 2022).
I expect similar numbers in 2023 as you only have to go to your local shops, supermarkets, cinemas, restaurants, the NHS and any large events to see that employees are workers that have recently arrived to these shores, over the past 18 months.
This is due to the lack of labour availability to fulfil these jobs in the UK.
Worth knowing that if migration numbers was the No1 reason to vote for Brexit, at the peak of migration from the EU, we reached a maximum annual amount of 400,000 people in one year.
So the Government that steered us into Brexit ( Take control over our borders) has presided over migration numbers almost doubling the peak it was pre-brexit.
Migration is a MUST not a want for the UK and we dont want to have that sensible conversation that migrates bring economic prosperity to the UK.
WAGES GROWTH VS INFLATION:
For the first time in a very long time, wage growth has been higher than inflation. Dont be too happy as average wages had been stagnant for over 20 years (when adjusted for inflation rises). IN Dec 2023, wages grew more than the current 3.9% inflation rate.
In theory this means that more people should be able to afford to get into the housing market, since according to some, property prices will adjust downwards!
WAGES MULTIPLE FOR HOME BUYING:
Although we are seeing that wage growth has been higher than inflation in the past few months. It still doesn’t help first buyers as the average property is still eight times the average earnings in 2023. Some are suggesting that this may come down to 7 times annual salary.
This is an issue as banks only lend up to 4 times net income, so the idea that somehow that’s going to enhance Home ownership for first buyers is bonkers.
The average wage in the UK stands around £30,000, and the average home around around £250,000.
In 2023 saw this government scrapping the 300,000 new homes target. we were already short of approximately 1 million homes at the start of 2023 and we end the year we’ve only around half of that target that has been scrapped now we met.
The fundamentals are as follows:
(1) the 1 million missing homes list grows.
(2) there are now no incentives or penalties to build and meet the 300,000 new homes target.
(3) developers are still land banking, which means that they wait for Land to appreciate in the long run before they build to maximise profits.
ARCHAIC PLANNING RULES
A lot of the wealth of the UK is locked into the housing market and it is no one’s interest, who holds power and influence on policy, to relax, restrictive rules and regulations when it comes to house building.
This is more tangibly experienced through our archaic planning process.
It makes no sense to have qualified planning officers with years of training on Town Planning to review planning applications and approve them, where relevant, only for these approved ‘by the professionals’ plans be squashed by a group of locals (the planning committee: consisting of the fishmonger, the Baker, the newsagent, bus driver, and so on), who have no relevant expertise to comment on these matters. These groups of locals to be more of the NIMBY’s (not in my back yard) that stop most of our worthwhile developments.
The So What?
Inflation down means interest rates will start to be cut by the Bank of England in 2024. My guess is sometime late in Q1 or early Q2. This means that money will become cheaper to borrow!
Impact for Housing Market:
For the housing market, it means that demand for houses will keep on increasing given all the variables i have listed above, like cheaper money, in combination with increase in net migration and fact that we are going to build less homes over the next few years.
This means that demand will keep on outstretching supply. This will invariably impact the housing market, given as alluded above that, as less (is) has been built to make sure missing million homes.
First time Buyer:
Sadly for the first time buyer, unless the bank of mum and dad steps to fund their deposits, it will not be them who will be starting a buying frenzy as the 8 x multiple of earnings will not be coming down anytime soon…. to be clear this either means a massive pay increase for the country or a property price crash near to halving which will also not happen.
MY FORECASTS (aka my guesses) as thats what forecasts are:
Therefore i would say these are my forecasts for 2024:
I will say that house prices will once again keep rising in 2024. So if you have money and desire to invest you need to just get on with it.
If you have to renew mortgages and can hang on then wait till middle of 2024 to bag the best 5 year rates (currently 6%+). I would expect them to drop to 4.5% or even 4%.
Rental prices will once again surge in 2024, based on the economics i have outlined above.
Institutional companies will keen amassing large portfolio of buy to lets as regulations have been removed and now we see even pension funds allowed to invest in housing stocks, along John Lewis and Lloyds bank.
Sourcing and buying below market value properties will remain a winning strategy.
Single buy to let is dead as too expensive to leave 25% deposit in and make a residual net rent profit of c.£300.
HMO regulations becomes even more complex. Energy prices increases will also erode the value from HMOs down to £700 per month (used to be £1000+ a couple of years ago). Remember the developers and builders win in a HMO strategy as you outsource the works to them and it will take c. 1year for you to see some money and on average would have cost you £50k to develop the house. This means it will take you years to pay back you initial investments.
Buying Blocks containing multiple flats remains a WINNING STRATEGY for these reasons:
You buy the income they generate on entry.
You bulk your portfolio multiple flats at a time and they each provide you with passive income.
You can RECYCLE ALL OF YOUR CAPITAL OUT of each project and keep using the same money over and over again to buy more, indefinately.