Reading between the headlines: the true picture of the UK residential property market

The UK residential property market continues to be the subject of constant media attention and scrutiny year in, year out. Readers are often presented with a headline rollercoaster of exaggerated and conflicting narratives, based on one isolated statistic, making it hard to know what’s really going on. Just take a look for yourself.

It’s time to debunk the headlines.

Much of this negative sentiment originates from the traditional estate agent sector, who are suffering a sustained squeeze on their businesses due to oft-cited “challenging market conditions” and the emergence of lower cost online alternatives such as Purple Bricks, Easyproperty and Yopa. The well respected RICS Residential Sentiment Survey is compiled monthly from the responses of 500 traditional estate agents to a series of questions designed to provide a barometer for demand, supply and sentiment in the housing market. For several years the survey have consistently reported a fall in metrics such as average stock per surveyor and sales per surveyor, without any mention of the growing presence of online estate agencies, which have inevitably contributed to the slow down of traditional agent activity.

In fact, according to recent analysis of Rightmove listings, the UK market share for online estate agencies has rapidly grown from 5.7% in January to 7.1% last month, with major online agents increasing listings by 32% since January.

So what’s actually going on?

In order to understand a complex market affected by multiple social and economic factors, we need to dig a little deeper. We’ve defined key indicators of market performance, supported by credible source data from government departments, to provide a clearer picture of the UK residential market.

By reviewing the actual level of residential property transactions over time, we see that sales remain much more stable than some headlines and reports on recent sentiment and activity suggest.

The UK HPI produced by the ONS is the most reliable way to track the performance of house prices, as it’s based on actual transactions completing in the UK. Other house price indices are based on either the mortgage books of major building societies, which inevitably include regional and property type sample bias, or, asking prices across current listings for sale. It reveals the current average house price across England is £226,000, growing by an average of 7.5% per year over the last 65 years. In the shorter term, residential property experienced 4.4% growth in the last 12 months – higher than GDP, wage growth and inflation.

Fig.1 Recent house price movement – Is this a market showing signs of great stress?

Source: UK HPI (Land Registry, Office for National Statistics)

Of course, we have to consider regional variations – notably the London housing market, with prices falling 1% over 12 months to the end of February, the first annual price fall in the capital since 2009, influenced by downward pressure at the prime end of the market, due in part to heavy rates of stamp duty). However, this is not representative of the wider London region or rest of the UK. It’s particularly promising to witness the resilience in areas of outer London and other regions where, for instance, Crossrail and regeneration projects have a positive impact on house prices.

We also shouldn’t ignore dips in the market historically, such as the 20% house price fall in the 1970s, and post 2008 financial crisis which saw an 18% dip. However, it is worth noting that during the 2008 crisis, share prices dropped by 40% – more than double that of residential property. The residential market has bounced back, especially in regions with strong employment and high population density such as London and South East of England. Therefore, as an asset class, residential property should be considered stable and resilient, even with the lower levels of growth we have seen over the past 12 months falling below the longer term average.

Rental growth is another key factor determining the performance of the residential property market. Rental yields tend to correlate with wages given the basic principle that renters will pay what they can afford. Data from the Office of National Statistics Private Rental Housing Price Index and CPI Annual Rate has recorded an average annual rental value growth of 2% over the past five years – just above inflation. Considering this, and the annual house price growth explained above, it’s clear that the residential property market is a total return asset class, delivering a growing income as well as capital growth.

Performance of the residential market is also determined by housing supply relative to demand. 80% of residential property belongs to owner occupiers and social landlords, so the vast majority of homes in the UK are not trading as investments. At present, London faces a genuine housing shortage, with 3.1% fewer homes than households. Below is a map demonstrating the ratio of homes to the number of household units by local authority area across England, with the darkest red areas representing places with a shortfall in homes relative to the local population. While there remains a small overall surplus at national level, with 2.1% more homes than households across England as whole, this has dropped dramatically since the 2008 financial crisis.

Source: Office for National Statistics, Department for Communities and Local Government

While politicians continue to search in vein for long term solutions to the “housing crisis”, UK house prices and rents look set to remain stable and sticky, supported by a shortage in supply, in a market where only 20% of properties are owned by private landlords who view the asset as a commodity rather than a home.

Affordability also inevitably influences demand for residential property. According to data from the Office for National Statistics, the average house price in the UK is currently 4.7 times the average national salary. While banks may have recently reported modest mortgage interest rate increases, they remain very low by long-term standards.

Source: Office for National Statistics, Bank of England

To compare, before the 2008 financial crisis, the average cost of servicing a mortgage was 23% of household income, nearly was double what it is now, suggesting that existing homeowners have spare capacity to sustain increased payments in the event that interest rates should increase.

Overall, to gain an accurate view of the residential market, it’s essential to dig beneath the headlines to understand the multiple factors influencing the market. Demographic trends, regional differences and changes in technology, for instance, continue to have a significant impact on how the market behaves.

Property as an asset class: what should investors bear in mind?
If you’re looking to expand your portfolio further, or invest in property for the first time, you may be weighing up property against other asset classes.

Here are a few areas to keep an eye on when assessing your options.

Consider asset classes with strong track records
Over the last 20 years, UK residential property has experienced an average total return of 10% per year. This compares to 3.7% for cash savings, 1.9% for inflation, 6.5% for gold and 6.5% for equities (stocks and shares). The below graph demonstrates the stability and performance of the UK residential property market (light blue line) and the London residential property market, versus the volatility of the stock market/equities (red line) and gold price (yellow line).

Sources: FTSE Russell, Bank of England, World Gold Council, ONS Land Registry HPI & ONS Private Rental Indices, IPD Annual Property Index

Review economic variables
Keep an eye on growth across all economic variables. The below 5-year forecast from the Office for Budget Responsibility shows strong house price and rental value growth. Importantly, this is in line with, and realistic for wage growth, and considerably higher than GDP or CPI inflation, i.e. the general rise in the price of goods and services.

Source: OBR UK Economic Forecasts

Weigh up risk
Finding a suitable level of risk is ultimately down to each investor, however risk vs reward analysis can support decision making. The spectrum below displays the position of each asset class based on its risk-return profile. You will see that residential property falls within the quadrant highlighted in green, representing an above average annual total return and a low level of volatility. In comparison, gold and equities represent a high level of volatility with a moderate annualised total return, i.e. lower past performance with an increased risk that investors will be forced to sell at a bad time


However you decide to invest, staying informed by comprehensive, credible research will help you gain a more accurate picture of the markets you’re investing in, and make educated investment decisions. By understanding the different variables impacting complex markets such as property, it’s easier to distinguish facts from headlines.




Capital at risk. The value of your investment can go down as well as up. The Financial
Services Compensation Scheme (FSCS) protects the cash held in your Property Partner account, however, the investments that you make through Property Partner are not protected by the FSCS in the event that you do not receive back the amount that you have invested. Past performance is not a reliable indicator of future performance. Gross rent, dividends and capital growth may be lower than estimated. 5 yearly exit protection or exit on platform subject to price & demand. Property Partner does not provide tax or investment advice and any general information is provided to help you make your own informed decisions. Customers are advised to obtain appropriate tax or investment advice where necessary. Please read Key Risks before investing.