Why 2022 is a great year to invest in real estate
As we embark on a new and hopefully brighter year, many people will start thinking about their financial position and planning for their future. For most, this will include some consideration of buying property – but is now the right time to buy? Many investors will be asking ‘will house prices drop in 2022?’
Most market experts forecast that property markets would crash in 2021 due to the Coronavirus. However, many property markets worldwide experienced some of their fastest growth in decades, far from crashing. Undoubtedly, some of the growth was due to buyers bringing forward buying decisions because of temporary government measures to support the market. However, part of the growth highlights the resilience of property markets and the fact that investors put their money into blue chip assets in times of uncertainty.
So investors will be asking themselves, is now the time to invest, or should I wait and watch the market? Our view is that 2022, 2023, and 2024 are likely to be some of the best years for investors to buy residential property; here’s why.
House price forecasts 2022 and beyond
House prices grew significantly in 2021 – so are we in a housing bubble? Our simple answer to that question is no. The vast majority of pundits around the world are forecasting growth across most markets:
UK – the Office for Budget Responsibility (the government’s independent forecaster) expects UK house prices to rise by 22.7% by the end of 2026.
Australia – ANZ bank forecasts 6% national growth in 2022, with Brisbane expected to rise by 9% and Hobart 8%.
New Zealand – House price growth is forecast to slow over the coming months after significant growth. However, ASB Bank Chief Economist, comments “Auckland’s still chronically under building compared to population growth. You’ve still got low-interest rates, strong population growth and a lack of supply, which puts a firm floor under prices”.
Low but rising interest rates
In most countries, interest rates are at all-time historic lows, base rates in our target countries are:
But, low interest rates are not going to last forever. Central banks in most developed economies had planned to start raising interest rates to combat rapidly growing inflation but delayed plans due to the unknown impact of Omicron.
In 2022, the reality is that interest rates will begin an upward trajectory and are unlikely to see any significant decline for many years. Both the UK Monetary Authority and the Reserve Bank of New Zealand have already started raising interest rates:
- New Zealand – the Reserve Bank raised its official cash rate by 25 basis points to 0.75% in its final policy meeting of 2021. It was the second consecutive rate hike; the Reserve Bank said it was forced to act because of surging house prices and the relaxation of Covid restrictions.
- United Kingdom – In December 2021, the Bank of England raised interest rates for the first time since the onset of the pandemic, increasing its main interest rate to 0.25% from its historic low of 0.1% as inflation pressures mount.
Interest rates – Impact for investors
2021 might not be the last year of low interest rates. However, the reality is that interest rates will unlikely be as low as they are now for many years to come. For most investors, interest costs will be their single largest ongoing expense the lower you can make them, the better.
As an investor, even if your interest expense is 100% tax deductible – you do not recover these costs until after you submit your tax return. Interest expenses can significantly impact your cash flow, particularly when you first buy a property and are trying to stabilise your income. You will have your highest incidental expenses when you buy your property in the first few years. Low interest rates allow you to create a free-cash flow to pay down your mortgage or put into other investments.
Now is also an excellent time for investors with existing properties to re-gear existing investments and lock in long-term interest rates.
Inflation
As the world’s global economies are open up after multiple lockdowns inflation is starting to bite. Inflation is now rising at its fastest pace in many decades. As the world returns to normal and demand for goods and services recovers, supply chains cannot cope. Inflation rates in our target markets are:
- Australia– 3.8%
- New Zealand – 4.9%
- United Kingdom – 5.0%
There are several reasons for recent inflation:
Consumer demand for goods and services has increased as economies come back online. Pent-up demand was not fulfilled as consumers have put off purchasing decisions at the pandemic’s height. As economic conditions have improved and unemployment rates reduced, consumer confidence has increased and so has consumption. Supply chains have not kept pace with increases in consumption and the net impact has been an increase in prices.
Global supply chains have struggled to cope with rapid increases in demand which have rebounded rapidly. Shortages in the supply of specific goods have affected many consumer goods. A noteworthy example being shortages in semi-conductors which have disrupted car manufacturing. In the UK, this increased demand for secondhand cars and used car price inflation rose to 18.36% in the 12 months to August.
Staff Shortages have been another issue many foreign workers have returned home during Covid lockdowns, increased levels of staff absence due to Covid and regulations preventing unvaccinated people from working have all caused significant shortages across all sectors. Staff shortages means companies pay more for staff and ultimately pass these costs on to consumers.
Global energy prices have risen sharply since April and these increased prices have been passed on to consumers. The natural gas market has seen considerable spikes in demand as economies come back to life with the wholesale price of natural gas increasing by 250% since January 2021.
Inflation – Impact for investors
Real estate investment is a good hedge against inflation. An inflation hedge means investing in an asset that is expected to appreciate in value by more than inflation. Real estate is a good inflation hedge for serval reasons:
- Property prices typically increase with inflation
- As the price of property increases, the loan to value ratio falls, meaning the equity in the property increases. Assuming a fixed rate mortgage, the monthly mortgage repayments remain static
- During periods of inflation, rents also increase, meaning gross rental income will increase
- For those buying property with debt, inflation helps to counteract the interest payments over time: If inflation is on average 2% per year over 30 years, and you have a fixed rate mortgage of 3%, you are effectively only paying 1% per year in borrowing costs
Rising construction costs
It is logical that if the costs to build property increase, developers will seek to pass as much of these increased costs on to consumers in order to maintain their profit margins. Over the past 18 months, the cost of the raw materials and the cost of labor employed to build new housing has risen dramatically.
According to UK Government data, average material costs for construction were 23.5% higher in August 2021 than August 2020. During the same period, the costs of imported timber and steel rose by a staggering 74%. The cost of raw materials, shortages in skilled labor and supply chain issues all contribute to pushing up the tender prices for contractors building new developments.
Construction cost inflation is expected to be a major issue for property developers for many years, as developers worldwide compete for a limited supply of materials and labour. Some consultants have forecast tender prices could increase by 10% next year and average annual construction cost inflation remain at around 5% p.a.
Rising construction costs – Impact for investors
Increased construction costs also translate into the slower delivery of new housing. By restricting supply, prices increase.
This combination of reduced supply and construction cost increases, combine to drive property prices. Investors will do well to leverage an off-plan position, buying now and securing the price of their property that will not be completed several months (or years).
Supply shortage of new housing
Many global cities suffer from a chronicshortage of new housing supply. Governments around the world have attempted to implement policies to try to redress the issue, but the imbalance persists, which continues to place upward pressure on property prices.
The UK government has never met its own new supply targets. The government estimates that the number of new homes required in England is 345,000 per year. In 2019/2020 the total number of new homes delivered was just 244,000.
New housing targets in Australia are set at State level. In the year to March 2021, New South Wales delivered 29,500 new homes against a target of 42,000 for the year.
Limited supply – Impact for investors
Unfulfilled demand together with chronic shortages of supply have a number of impacts for property markets.
First, with cities such as London, Auckland and Sydney all facing long term shortages of housing, the demand and supply imbalance will put upward pressure on prices. Pricing pressure is likely to be even more significant over the next 12 – 18 months as there is huge competition for materials and labour.
In addition, it also creates an effective floor under pricing because even if there is economic trouble in the future. Prices are unlikely to drop significantly because there are so many buyers who will step into the gap if they believe there is an opportunity. We have seen this with property markets around the world with Coronavirus, the UK government introduced a Stamp Duty holiday which amounted to a maximum saving of £15,000 in taxes – the resulting impact was almost a 10% increase in house prices.
Rising rents
Rents in the UK rose by an average of 4.6% between September 2020 and September 2021, the strongest rental growth for 13 years according to Zoopla. According to CoreLogic, in Australia year on year national rental rates are increasing by 8.9%, the fastest annual rate since July 2008. It’s a similar story in New Zealand, with average rents rising by NZ $43 per week between September 2020 and September 2021.
Rent increases – Impact for Investors
Increasing rents are obviously good news for investors, who are able to drive their returns through increasing rents. Increasing rents typically coincide with reduced void periods (the amount of time the property is empty) between tenancies, which will also help to improve the performance of an investment property.
Growing tenant pool & cost of living squeeze
With property prices increasing, the cost of borrowing increasing, the cost of living increasing and lending criteria tightening, ‘would-be’ homeowners are finding it increasing difficult to purchase their first property. Potential home-owners are ‘trapped’ in rental property for longer periods – unable to save as much for a deposit whilst property prices continue to increase. According to Nationwide, a typical 20% deposit in London is now more than £80,000. Nationwide estimates that it will take first-time buyers 8 years to save for a 20% deposit on average across the UK, rising to 10 years in London.
Growing tenant pool – Impact for Investors
The imbalance of demand and supply of rental properties is increasing, meaning only increased rents and reduced void periods. Increased numbers of people are forced to live in rental properties, putting upward pressure on the demand for rental properties. At the same time, there is a continued lack of new supply of available rental properties.
Conclusion
In our target markets of the UK, Australia, and New Zealand, the factors underpinning high house price and rental growth (low but rising interest rates, inflation, rising construction costs, supply shortages, rising rents and a cost of living squeeze) are all in place. Opportunists will capitalise on the current economic and real estate market conditions to invest now and take advantage of the investment potential.
Important notice: Proptech Pioneer and its associated companies seek to provide real estate investors with guides, information and tools, but we cannot guarantee this information to be accurate or perfect. You use the information at your own risk and accept no liability if you rely on this information. Proptech Pioneer is not a tax advisor, accountant conveyancer, lawyer, financial advisor or mortgage advisor. You should seek independent advice from independent professionals before making any investment decision.
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