While fluctuating house prices and forecasts may unsettle some prospective buyers, anyone looking at property investment as a long-term venture should be mindful of other factors, too.
Capital appreciation and rental yields are the two main sources of profit and return for buyers and owners in the property investment space. Ideally, an investment needs to have good prospects in both these areas to ensure maximum success.
However, while capital gains are only realised upon a future sale of the property – and with many experienced investors holding onto properties for a long period of time to maximise their gains in this area – rental yields create an ongoing, regular income for the investor, and could arguably be a more important aspect to factor in.
When predicting what will happen to house prices, market forecasts can only assess the current situation alongside historic patterns. With rental yields, though, investing in an area with strong tenant demand, good employment prospects and sought after local amenities, can ensure more certainty.
Predictions for property investment
Earlier this month, Savills released its latest UK House Price Forecast, which also covers rental value growth. It represented a major turnaround in its outlook compared to last year, and explained its reasoning behind its new predictions.
It should also be noted that its forecast was released prior to the recent changes within the government, including the appointment of new Chancellor Jeremy Hunt, and his budget changes.
Over the coming five years, Savills expects house prices to increase by a cumulative 1.5% across the general property market in the UK. This breaks down as a 6% increase by the end of 2022, a -5% decrease in both 2023 and 2024, and a return to growth with a 2% rise in 2025 and 4% rise in 2026.
While many media outlets focus on the downside over the next two years, the return to growth is indicative of the fluctuating nature of the markets and prices over time – and is a reason why property investment is often best entered for its long-term prospects rather than short-term.
The major contributing factors for the forecast, says Savills, are rising inflation, the interest rate hike affecting mortgages, and a natural slowdown after the acceleration seen post-Covid, as well as the political dimension affecting confidence.
What about the rental market?
For those operating in the property investment space in order to ‘flip’ property and make a quick profit, most would argue that the current climate does not provide an ideal backdrop for this kind of investment. However, for those operating their property investment as a buy-to-let, Savills’ rental forecast is much more upbeat.
Ongoing low supply of rental property, says Savills, is one of the major influences that it predicts will push rental values up by a cumulative 20.5% over the next five years. Broken down, this is a 5% increase for 2022, 4% in both 2023 and 2024, and 3% in both 2025 and 2026.
These figures represent the UK as a whole, but there are likely to be major differences across the country as rental markets vary greatly – with the same being the case for house prices.
The Savills report adds: “While new landlords may be proceeding with caution due to higher mortgage costs, we believe more accidental landlords may return to the lettings market as the sales market cools down. These are property owners who decide to let out their property after failing to sell for the asking price.
“A high degree of fluidity on financial markets and inside the Conservative Party means we will revisit these numbers before the end of 2022.”
While anyone operating in the property investment space is likely to be keeping a close eye on how the situation progresses over the coming weeks and months, focusing on the whole picture rather than solely on headline house price forecasts can be a key strategy for ongoing success.
