Sell Profit, Buy Value

Yesterday’s prediction that house prices may correct 40% hit us by surprise. What arguments are there to call for such a decline? 40% devaluation would be a result of an economic crisis, not a correction. Here is what we think may happen to house prices and property values in the medium term.

There isn’t clear enough arguments or economic factors to suggest that prices would collapse. They will correct in some parts of the country, such as London, and rise in others, such as northern part of England. The statement of the possibility of the decline in house prices comes as a result of historic events that a crash follows a decline in London’s property market. Which is fair enough, but there is no decline in London yet. The prices do slow down and as we have mentioned previously, there are a number of reasons behind it. Main to point out would be:

  • number of new developments completed and more supply entering the market
  • Brexit and concerns over trading agreements and job security puts the investors on hold
  • government tax policies that harm property investors and making them think twice before buying a buy to let property.

What we have seen for a couple of years now, is that investors looking to invest in properties outside London. There are few factors that driving this trend:

  • diversification of the investment portfolio
  • properties are cheaper
  • local economies seem to do better so affordability rate increases prompting people to move to better rental accommodations or onto the property ladder

Investors in London are no longer impressed with rates of return on their investment and the standard model of buying a property and holding or letting it out no longer does the trick for them. Let’s not forget about the additional 3% of stamp duty, not to mention Section 24. Cash-rich investors in London we have pleasure to speak to, are moving to property development, evolving their original buy to let business model. They see much greater returns from this form of investing. Whether it’s a simple refurbishment, house extension or whole new development project it makes more sense for investors to do that than just put money in buy to let property. This obviously drives the supply level further. Although oversupply is not good for the house prices, we are not even near to meet the basic demand. Therefore, looking long term this is not something that makes developers worried too much. We wrote last time that weaker pound should attract overseas investors to invest in London. Inflation is not good for property prices, but rising interest rates are, of which we have been tipped off by the governor of Bank of England. The pound has reacted positively to this news. Of course, higher interest rates will probably result in a decline in transactions as it will be more expensive to buy a property. Again, from the investor’s perspective, there is no doom and gloom. Affordability issues will delay the prospect of buying a property for some and cause a necessity of renting one or staying where they are. The prospect of falling into a negative equity territory is a virtuality. Pretty much all new mortgage purchases result in negative equity if you would be looking to sell within first five years. Similar thing with new builds purchases which are always sold at premium prices. The negative equity territory is only dangerous when a person cannot afford to keep up with mortgage repayments and must sell the property now.

Hence we believe that buy to let still have good future ahead. So does the build to rent which definitely will be supported further by the government. This is particularly when it will become clear that measures adopted inflate rental prices rather than help to tackle the housing crisis. We would like to remind that property investment is not a short-sighted game. We need to take into account current measures and economics but translate them into the impact it may have on our portfolio in the years to come rather than next month. Yes, of course, high-end properties which are currently on the market will suffer from wider price fluctuations adversely or positively affecting average house prices. The vast majority, however, should not be worried about big price collapse for now. We are all more or less in ‘sit and wait’ mode trying to figure out what is going to happen. This causing the number of transactions to fall not economic factors.

The medium-term prediction is that house prices will go up, not down. This seems to be reassuring enough to more experienced investors. They don’t sell, they grow their portfolio and learn how to be more tax efficient. We see more property companies being established and private assets transferred into limited companies. It offers investors much more flexibility to manage costs and any financial burdens. It is also a great vehicle to run your property business under benefitting from potentially greater returns, due to not being affected by extra stamp duty or changes brought by Section 24. If you thinking of going limited, always take an advice from a tax advisor specialist as this is a very complicated field and requires extra care when doing so. It is also worth mentioning that it is not suitable for all property investors.

What we have learnt from previous financial crisis, is that both buy to let and build to rent does not only generate healthy regular income but offers a fantastic way to diversify your property investment portfolio. Above all, from the long-term perspective, the vast majority of properties in UK will be more expensive not less. On average every 9 or 10 years, house prices increase in value by half. It is always good to speak with an expert and exchange opinions which we love to do. However, you should always feel strong about your decision. If you are not sure and have doubts, keep your eyes open and keep looking. That certainty will eventually come with another purchase, another time. Share your thoughts with us or if you would like to have a chat, get in touch and we will be more than happy to listen to you and offer some advice where we can.