The intrinsic links between property and business sectors are striking. Its not just homeowners that want high houses prices in the UK. Its also the Treasury, which came in receipt of an extra £1.1bn as a result of Stamp Duty surcharge yields; the banking sector as mortgage lending hits its highest rate (January 17) since 2008; and British businesses, who rely on confidence micro and macro economy.
It’s hard to think of a more integral industry than the UK property market. With net worth at a record high of £6.8tn, up £1.86tn since 2012 alone, the benefits of sustained growth in the market doesn’t just apply to homeowners but the wider economy too.
The intrinsic links between property and business sectors are striking. It’s not just homeowners that want high houses prices in the UK. It’s also the Treasury, which came in receipt of an extra £1.1bn as a result of Stamp Duty surcharge yields; the banking sector as mortgage lending hits its highest rate (January ’17) since 2008; and British businesses, who rely on confidence micro and macro economy.
The significance of the property market
Today, London is known as the world’s top destination for high-net worth individuals, with a buoyant property market that attracts more cross-border investment than any city in the world. This is welcome news, not only because we’re entering into Brexit negotiations, but because there is a direct link between declines in wealth (for example the decline of property assets) and our levels of consumption and business investment.
When a drastic change of circumstance in property markets occur, as witnessed in 2008, a domino effect spreads into the real economy, from consumer spending to confidence in the business community. Total property value is a direct reflection of generated income and wealth, both personal and commercial. Therefore, if the former is shrinking, the latter will follow suit.
Businesses across the board, from finance and construction right through to retail, rely upon steady growth and resilience in the property industry. Overseas lending to property companies more than doubled during the 1980s, and a boom in bricks and mortar investment rose to new heights during the 1990s, which set the stage for accelerated growth in global property assets.
Who benefits from a successful property market?
How does all this filter into the economy in layman terms?
To cut a long story short, when the property market is strong, banks feel more confident about lending to businesses and homeowners, consumers spend more, and GDP growth increases. All this makes the UK an even more attractive place for investment and job creation. Those who invested in property 20 years ago have seen the value of their assets surge, enabling them to have more choices in life and more disposable income to simply enjoy themselves.
The property market casts a surprisingly wide net across society, from the millions working within real estate and construction, through to the millions of consumers who are homeowners and investors.
Let’s address the immediate groups first. When a property market is buoyant, activity is high which benefits solicitors, surveyors, planners, estate agents and architects. Market confidence also greatly benefits the construction sector which casts a wide jobs net, from builders and contractors, to technicians, project managers and designers.
Now, we’ll discuss the secondary tier of beneficiaries across a population: consumers and the wider business community. In 2016, Stamp Duty Land Tax alone contributed 11.65% to the government’s economic surplus. This is extra funding that can be spent on infrastructure improvements for workers, better public services, new developments for office space and residential housing, and a whole variety of amenities that make our lives a little healthier and more enjoyable. The money also provides extra funding for skills investment and the rollout of broadband to rural businesses, two ingredients that are crucial for sustainable business growth.
Property has been flagged as one of the best investment assets for later life. 46% of us now consider property investment to be the best way to save for retirement according to recent ONS figures, while UK pension funds have already invested billions into the property market. If these pension funds write down the value of this property portfolio, this could hit thousands of UK investors, many of which are classed as small savers. On the other hand, when customers remain invested and focused on the long-term benefits of the property market, prices remain stable and tax receipts stay high.
Could the government do more to help?
The government is under intense pressure to build more homes to bring down house prices to more affordable levels. As the above highlights, however, lowering house prices comes at a cost to the wider economy. Therefore, long-term, sensible solutions are needed, rather than sudden jolts to the system.
In the run up to ‘08, for example, we built 4 new homes for every 3 new people but mortgage lending grew by 370%. If this gets out of control once again, the government must take the reins to curb potential damage that will hit the economy and businesses operating within it.
House price growth does have a positive effect on the UK economy, but it can also be a double edged sword, as businesses have found out this March. Economic recovery, which has been accompanied by higher house prices, will now affect business rates which will cut into profits. Rates already equate to approximately 50% of annual rent, with retailers paying a quarter of all rates. Businesses shouldn’t pay the price for a better economy, which inevitably raises property prices.
Narrow margins in the retail sector, coupled with the highest rates in the G7 should force them to think again at this latest move.
In the same vein, an assault on stamp duty in recent years, which has had a dramatic impact on the London markets, has hit landlords and prime property markets. This spring, the Budget was noticeably mooted on the subject, which should have reintroduced tax incentives to restore equilibrium to the sector. A proposal to introduce ‘family friendly’ longer-term tenancies will provide landlords some security of long-term rental income, but pales in comparison to the substantial hit incurred last April. The government must do more to acknowledge legitimate landlords, rather than highlight the bad apples in the bunch.
The Winkworth way
Here at Winkworth, we pride ourselves on our market knowledge and our unique perspective on the entire process of matching people with homes.
Thinking of living in London, the most sought-after investment destination in the world? Take a look at our buyers guide to read our quick summary of useful tips and reminders for buyers.