With governor of the Bank of England Mark Carney stating that a 35% fall in UK house prices could be ahead if a no-deal Brexit becomes a reality, the outlook for buy-to-let investors may be precarious.
Of course, a deal may be signed between the UK and the EU, and this could lead to an improving performance for the UK economy. The reality, though, is that the UK housing market may struggle to generate the kind of growth that has been seen in the last 20 years. Rising interest rates, affordability issues, and political risks could mean that house price growth disappoints to some degree.
Changing economy
Assuming a Brexit deal is signed, interest rates are likely to rise at a brisk pace over the medium term. A Brexit deal could provide consumers and businesses with greater confidence in the UK’s economic outlook, and this may lead to a stronger economic performance. And with the rest of the world economy delivering high growth at the present time, the Bank of England may seek to cool inflationary pressure over the medium term.
As such, the availability and affordability of mortgages may decline. A higher interest rate would also make mortgage repayments less affordable, and this could prompt a slower rate of growth in house prices.
Cyclical events
Of course, no asset has ever risen in perpetuity. After two decades of growth, UK house prices may experience a period of difficulty, with the market having been boosted by favourable government policy in recent years. The Help to Buy scheme has allowed many first-time buyers to own their first property without having large deposits, while the stamp duty relief scheme may also be having a positive impact on house prices.
Given the precarious political outlook for the UK, policy change in housing would not be a major surprise. That’s especially the case since housing affordability is becoming a bigger political issue – particularly among younger voters who are struggling to get onto the property ladder. As such, the price rises which buy-to-let investors have become used to may be less impressive over the coming years.
Investment potential
While there’s a lack of supply of new homes, demand for them could come under pressure, due to rising interest rates and a change in government policy. As such, investing in a broader range of assets rather than property could be a wise move, since the risk/return ratio for buy-to-lets could be less appealing now than it has been for a number of years. And with tax changes coming into force, shares may offer a simpler and more profitable outlook.
Given that the FTSE 100 has a dividend yield of over 4%, and has recently experienced a pullback, it may offer good value for money for the long term. While potentially more volatile than house prices, ultimately it may generate higher returns in the long run.
