The demand for homes is set to exceed supply until the 2030s, says financial expert Peter Sharkey. 

Just where is the property market heading? Will it finally suffer a slow, terminal decline, or is it likely to first experience a prolonged spell in the doldrums before bouncing back?

Commentators appear convinced that 2023 will be a tough year for the property market as a combination of inflation, economic slowdown and irritatingly high interest rates take their toll. Yet the chances of a permanent fall in demand for homes appears negligible. Getting on the housing ladder remains a pivotal aspiration for millions of younger people, mindful of the fact that house prices have risen by an average of 6pc a year for the past 40 years – when inflation and interest rates have generally been much higher.

This would suggest that the UK property market’s long-term outlook is sunnier than some would have us believe, which – from an investors perspective – is important.

Most investors do not have absurdly short investment horizons. Instead, they take a long-term view, happy to sit on their hands until the right opportunity comes along. At present, there appears to be a shortage of such opportunities, although many suspect the situation may soon change, ushering in a period when boldness will pay. The scenario is tailor-made for ‘value’ investors, the best-known of whom is Warren Buffet. His investment approach was summed up in 1987 when he wrote: “Our goal is to find an outstanding business at a sensible price, not a mediocre business at a mediocre price."

Buffett evaluates shares as though he were buying the whole business. In other words, he looks for enterprises he understands, ones with favourable long-term prospects, operated by honest and competent people and available at an attractive price. Moreover, Buffett sees no essential difference between value investing and what some analysts refer to as ‘growth investing’. The two approaches are “joined at the hip” he maintains, rightly confirming that growth is an inevitable component in the calculation of value. 

The principle of value investing is based upon the premise that the stock market is not completely efficient. Instead, it is frequently distracted by a series of other factors (‘noise’) which cause share prices to fluctuate wildly – movements that have little to do with a company’s fundamental value. When share prices fall, investment logic says that they will offer better than average returns as they move towards their correct value. It follows that the value investor must unearth shares that have suffered prolonged price falls for no obvious reason and hold them until the situation rights itself.

Ditching any need for immediate results, value investors seek first to avoid losing money. Value investors also consider share certificates not as pieces of paper suitable for trading but as documents which confer fractional ownership in the underlying business in which they’ve invested. This attitude is essential to successful long-term value investing because when a company’s share price falls, it can be interpreted as an opportunity to acquire another tiny piece of the enterprise at a reduced price.

Which brings me back to the property market and the housebuilding sector in particular.

In 2022, the impact of rising interest rates coupled with a cost-of-living crisis deterred prospective new home buyers. Property sales also suffered from the Help to Buy scheme’s closure to new applications at the end of October. Housebuilders also had to contend with higher material and labour costs, sluggish house prices, cladding-related expenses and a painfully drawn-out economic slowdown which could yet develop into a fully-fledged recession.

No wonder 2023 could become sticky for housebuilders, although a stark statistical imbalance suggests buyers will not abandon the property market. Between 2012-22, an average of 153,000 new homes were built each year. Meanwhile, England’s population is forecast to grow by 190,000 a year until 2030.

A period in the doldrums appears likely for housebuilders, but given the sustained demand for homes, their longer-term prospects look particularly attractive.

For more financial advice, check out Peter Sharkey’s regular blog, The Week In Numbers.

This column is for general information only and cannot be relied on as financial advice for individuals. Consult your professional adviser.