If you were to ask most people what was their most successful investment, apart from the occasional erstwhile Warren Buffett, almost everyone would say their house. These days we all talk about houses as incredible investments. Oh, and, luckily enough, they’re a place to live as well!
But, if you’re old enough, cast your mind back to the 1960s. Can you guess what the average house price was? £2,500. These days, that’s about enough to pay for a family holiday to Marrakech.
In the interceding years, we have seen a transformation in how property is valued. Whilst in the 1960s buying a house was just a step on the way to sorting out your life, now it’s about the return you can make each year.
While that’s great for those who bought a property all those years ago and have seen their wealth steadily accumulate, it’s not so good for those who want to get their foot on the property ladder today.
House prices are storming ahead
Which brings us to the property market of 2015. The average house price in the UK is now £179,817. The annual rate of increase in house prices is 4.6%. This has slowed from the 10%+ increases of last year. Just a few months ago we overtook the pre-Credit Crunch high. The share prices of Lloyds Banking Group (LSE: LLOY) and Barratt Developments (LSE: BDEV) are rocketing.
But, I hear you say, is this really a boom? What about the number of property transactions? We have all heard people say that they can’t buy suitable houses, and that most people are reluctant to sell.
Well, let’s check the figures. Here are the total number of property transactions in the UK in each of the past five years:
2010: 879,050
2011: 883,880
2012: 932,010
2013: 1,068,110
2014: 1,222,770
There are now far more home purchases than in the depths of the Great Recession. We have a bone fide house price boom.
And it’s not difficult to understand the reasons behind this. Demand for property in the UK is high because of population growth and a motoring economy, and housebuilding is not keeping pace with this. If you throw into the mix mortgage rates that are as low as they have ever been, it is no wonder that the cost of buying a home is at a record high. And when a property appears on the market, it is snapped up in fairly short order.
Which means, despite having risen a lot over the past year already, both Lloyds and Barratt Developments are strong buys. I expect the number of transactions to steadily increase as the housebuilders launch more and more new developments. Barratt cleverly bought land when prices were bottoming out, and they are now reaping the rewards. Likewise Lloyds provides far more mortgages than any other UK bank, and will benefit from an influx of buyers.
And neither company looks expensive, with Lloyds trading on a 2015 P/E ratio of 11.46, and a 2016 P/E ratio of 10.21, with dividend yields of 3.25% and 4.78%, and BDEV on a P/E ratio this year of 14.29 and next year of 12.27, with dividend yields of 3.89% and 4.66%. These are income plays with impressive growth prospects.
But are we leaving first time buyers behind?
Perhaps a more pertinent question is: who is buying these houses? The proportion of purchases made by first time buyers is near record lows, while many are investing in property from overseas or for buy-to-let, and UK rents are the highest in Europe. That’s why this really is a housing boom like no other, and we really do need to invest in renewing this country’s housing stock.
Perhaps we need more of that 1960s spirit. Buying houses should not be, first and foremost, about making a canny investment, but about putting a roof over the head of you and your family. The pendulum has swung too much the other way. We need to get our priorities right once again.