UK’s Buy-to-Let Property Market likely to ride out coming Economic Storm

Would-be-buyers of UK residential properties have faced a daunting barrage of financial and economic forecasts and reports in recent weeks, many of them seemingly contradictory.

By Skipton International

Most experts seem to agree, though, that however good things have been for certain sectors until now, Britain – like most of the rest of the world – is in for a difficult year ahead.

This has meant that those contemplating committing to a mortgage on a house or flat in the UK have been having to consider such news as the fact that inflation hit a 40-year high of 9.4% in June, which was quickly followed by a Bank of England announcement, on 4 August, that it was hiking interest rates by 0.5%, to 1.75% – the largest such increase in 27 years.

This in turn came alongside a Bank of England prediction that inflation would reach 13% by December, and would be accompanied by a prolonged recession, (which some had been saying had already arrived).

Prior to this, UK property-buyers had been boosted by an announcement in late June that Knight Frank, the property consultancy, had revised its UK residential house price forecast upwards, citing the combination of the soaring rate of inflation, and continued low levels of new housing coming into the market.

What’s a buyer to think?

Though no one can forecast the future, some property experts say they’re expecting that the UK residential property sector is likely to fare better than most others, no matter what the future holds, largely for the same reasons that it’s been so robust until now – although no one suggests it won’t slow down significantly, if a major recession does ensue.

While Skipton International has, like most other UK buy-to-let mortgage providers, seen a gradual cooling in demand recently, this is coming after more than three years of astonishing growth in buy-to-let mortgages and mortgage applications in particular.  

This is due to a couple of trends such as the unusual weakness of the UK’s pound sterling relative to the US dollar, alongside political and Covid-induced economic uncertainties.

The UK property market has seen some growth coming from an unlikely source i.e. expats currently living in the US are reviewing their options in the wake of that country’s rising levels of gun crime, growing political polarisation, and high residential housing costs.

Then there’s Hong Kong where interest in the UK housing market is seeing a continued spike in demand for buy-to-let properties. In fact, Skipton International saw the value of all Hong Kong mortgage applications exceeding the whole of August 2017 last month alone.

Hong Kong buyers, of course, benefit from the strength of the US dollar relative to the pound, because the Hong Kong dollar is tied to the US dollar, as are several other major currencies, including the UAE dirham, and the Saudi and Qatari riyals.”

At the pound’s lowest, in mid-July, a dollar could buy around £1.1868, but by July 31 it stood at £1.2165 to the dollar, though it was still 12.5% lower than on the same date in 2021.

This means for someone living in, say, Hong Kong or the UAE, and who finds themselves with some spare cash that they’d like to invest over the long-term, or might give them a residence to return to in 20 years’ time, a buy-to-let property back in the UK could be one of the options they’ll be thinking about.

 When you add in the current, and significant, currency advantage, means the housing market in the UK, now more than ever before, is good value for a family home or as an investment as opposed to leaving the money in the bank.

While Hong Kongers make up the bulk of UK buy-to-let mortgage applications Singapore is close behind, followed by the U.S.  

Applications coming from France have nearly trebled since January, tying it for fourth place with Saudi Arabia, with Ireland and Spain following, in fifth and sixth place respectively.

In the UK, places like Reading, Bristol and Cambridge are popular choices for overseas investors. London is beginning to get hot again as employees look again for properties to rent or buy as they return to the office after moving away and working from home. According to Connells Group – a British estate agency, owned by Skipton Building Society – says it has been seeing strong rent rises and improving yields in recent times across the UK’s property markets, and that demand for rental properties showed little sign of abating.

The relaxation of Covid restrictions has seen the return of overseas students into London, which has certainly had a positive impact on rents there, but cities away from the capital – such as Leeds, Manchester and Cardiff – have also benefitted from more general increases in tenant demand.

Stamp Duty increase

One thing that overseas buyers are beginning to have to consider, when buying UK properties, is that as from last April, non-UK resident buyers of residential property in England and Northern Ireland are required to pay a new 2% surcharge on the so-called Stamp Duty Land Tax that is levied on all property buyers at the time of purchase.

Without the favourable exchange rates, this may put some overseas buyers off. But the 2% is unlikely to have a major impact long term, particularly as it comes alongside similar measures being taken by other countries with desirable (and also prone to over-heating) housing markets, including Canada, Singapore and New Zealand.

What the future holds…

Some would-be house-buyers might find some reassurance in the news that Knight Frank said it was revising upwards its UK residential house price forecast; its forecast for all subsequent years to 2022 remained, they said, unchanged  

There is one fact that remains, and bears repeating in the current environment.

Property’s best thought of as a long-term investment meaning five years minimum and being half for 10 or more years.

For an expat Brit who is planning to return to, say, Devon or Cornwall one day, and who has the dollars or UAE Dirhams or even pounds sterling for a deposit, a buy-to-let property could make sense than some other options.