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Are property investments more important in economic uncertainty?

Updated: Jul 9, 2018

Economic uncertainty implies the future outlook for the economy is unpredictable. Economic uncertainty usually involves the following:

· A higher and more volatile inflation rate

· Economic downturn – negative economic growth

· Exchange rate concerns

· Fear of unemployment

· Level of government borrowing

· Change in economic structure – UK leaving the European Union (Brexit)


Inflation

Inflation unexpectedly fell in March to its lowest level in a year (2.5%). In the latest sign of the weakening impact of Brexit on household finances, the consumer price index (CPI) dropped to 2.5% in March 2018. Economists expected inflation to remain unchanged at 2.7%.


Inflation has fallen in recent months, partly helped by the drop in the value of sterling. The devalued pound pushed up the cost of imported goods, forcing consumers to decrease their spending. The Bank of England’s governor argued that the economic growth rate at which higher inflation is triggered is lower than at the time of the 2008 financial crisis.


Economy

The UK economy is currently 11% bigger than it was before the recession of 2008-2009. Since the recession, there has been twenty-one consecutive quarters of growth but the annual rate of growth of real GDP has been weakening since 2014. The slowdown is not entirely due to Brexit-related factors.


Exchange rate

The depreciation (fall) of sterling has the following impact:

· Exports increase as they are cheaper to purchase from other countries thereby benefiting domestic companies and to more job creation while lowering unemployment.

· Imports are more expensive (has led to consumers spending less and reducing inflation)

· Higher economic growth


Unemployment

Unemployment currently in the United Kingdom is at a 43-year low. Unemployment dropped to 4.2% of the labour force in February 2018, equating to 1.4 million. Youth unemployment has declined from 20% in 2012 to 12% in 2018 (equivalent to 500,000 people aged 16-24).


Level of government borrowing

The United Kingdom budget deficit was £42.6 billion in 2017-18, equivalent to 2.1% of GDP. The deficit has shrunk by 75% since 2010. The government debt was 86% of GDP in March 2018, compared to 71% of GDP in 2010.


Economic structure (Brexit)

Business investment decreased by 0.2% between the final three months of 2017 and the first quarter of 2018. Companies are not investing as they don’t know what form Brexit will take. This decline in investment is expected to continue.


Importance of property investment during economic uncertainty

While inflation is low and unemployment is at a record low, the economic uncertainty partly due to Brexit can lead to a favourable buyer’s market. Some homeowners place their homes on the market as they fear their property value will drop placing their loan into negative equity. Negative equity is when a home loan exceeds the value of the property secured on it.

There are likely to be more properties listed than there are buyers. As supply outstrips demand, there is a lot of room to negotiate good prices which will deliver strong returns in the long term.


This will be beneficial in acquiring a property which is converted to an upmarket HMO for professional sharers.


In addition, the devaluation of sterling against the US dollar offers very favourable exchange rates to international investors.

Investing with a reputable company dealing in property can yield higher than normal returns during periods of economic uncertainty.


Contact our team to find out how we can help you achieve your investment goals.