UK Properties 2016: North 1 South 0

The North South divide shows no sign of disappearing anytime soon as Hometrack released their quarterly house price index.

And it seems that the north is finally taking a lead, with house prices in southern cities seemingly taking a dip in July's figures.

House prices in Manchester saw a 3.4 per cent rise in the three months to July, with a year on year increase of 8.4 pc.

This is believed to be in part due to the fact that 'prices are rising of a lower base' as well as 'record low mortgages'.

If you add 6.5% average gross yield on top of the capital appreciation of 8.4% for Manchester, you get 14.9% total return.

In London, the capital gain 11.7% + 3.5% = 15.2% total return. It's about the same. But the last quarter return showed Manchester in the lead in terms of capital appreciation (3.4% vs London's 2.1%). That's 1.3 percentage points lower per quarter, annualised 5.2 percentage points, and another 3 percentage points lower for rental yield. London is losing out by 8.2 percentage points a year. If Manchester outperforms London by four years, you will get 32.8 percentage points difference. Now that's a great divide.

Conclusion

I look at several trends before investing:

1. Starting point net yields after deducting expenses, or Net Operating Income (NOI).
2. I look at mortgage borrowing cost and the spread between NOI and borrowing cost.
3. job creation in the city. How many industries are thriving in the industry. Is it a city dependent on one single sector (Aberdeen)? I will avoid that.
4. on coming supply. I check housing starts. It should not be more than the household formation.
5. Median price of house over median income. Is it affordable? This is paramount as if the majority of the people cannot get mortgages or pay cash for a property, the median price is bound to stagnate. Couple that with overs supply and falling rents, like in Singapore and Hong Kong, prices are likely to tumble.