Real estate is currently hailed as the favorite asset class of a plethora of big investors, including Starwood Capital Group chairman and CEO, Barry Sternlicht. The reasons are twofold: on the one hand, the demand for housing is growing in countries like the U.S. and the UK, while supply is low. Constructors of rental properties in the U.S., for instance, are having difficulty obtaining the finance they need without end users (tenants) being fully committed to a lease, and the costs of construction itself are projected to rise over the next few years. The second reason, Sternlicht told CNBC, is the relative safety of this type of investment. Those who buy real estate today are doing so on 5% or 6% yields and financing their purchase at 2.5%, so that leverage comes into play from day one.
The Housing Crisis in the UK
Like the U.S., the UK is desperate to ameliorate its housing shortage, owing to rising prices and a lack of new builds. Efforts have been made to increase the affordability of homes, though. In 2017, house prices increased by just 2.6%, with prices in London falling for the first time in almost a decade. Mortgage lender, Nationwide, predicts that price growth is likely to slow down further in 2017, yet despite lower prices, affordability is still an issue. Robert Gardner, chief economist at Nationwide, told The Guardian that it would take a typical buyer almost a decade just to save for a deposit in London, with average prices standing in the region of £470,922 at the end of 2017.
Prices Projected to Rise in the U.S.
The pricing situation in the U.S. differs, in that steep rises predicted. Here, those who are thinking of selling their homes to obtain greater liquidity (such as seniors wishing to bolster their retirement income) should hang on to their homes for the moment, considering alternative ways to raise finance, including a reverse mortgage if they plan on staying in their home for at least 10 years before considering a sale. This is because home prices are increasing twice as quickly as income growth. As noted by the Mortgage Bankers Association, fewer homeowners are willing to sell and many are waiting until prices reach a high to obtain a more attractive ROI upon sale. Currently, prices are around 6% higher than they were at their peak, prior to the bursting of the real estate bubble in 2006.
America’s Wage Growth is Stagnant
The U.S. economy is generally buoyant, yet there is a mismatch between economic and wage growth. A study by the Economic Policy Institute (EPI), published in 2013, noted that middle-wage workers had experienced a stagnation in their hourly earnings since 1979, with only a 0.2% annual growth. This is far beneath the 3.5% annual inflation rate for this time frame. The situation is such that although there is a big demand for housing, continual price rises mean that for many Americans, affordability is already proving to be a significant obstacle.
The UK is also Feeling the Pay Squeeze
Leading think tank, The Resolution Foundation, reports that the average salary in Britain will still be around £20 lower than it was at the start of the global financial crisis. Productivity growth has been consistently lower than OBR estimates. In essence, warn experts, weaker productivity will result in a GDP which is £44bn less in 2022 than predicted by the March budget.
Real estate undoubtedly will continue to be a favored asset class both in the UK and the U.S. in the upcoming years, owing to a big gap between supply and demand and stagnated wages. Buying a home may continue to be a challenge for younger generations (including millennials) owing to lower affordability and the reticence on the part of baby boomers to sell.