Many of you will have seen the headlines: record price increases, record numbers of transactions, some properties being sold within 1 day of going on the market. The question that will on many investors' minds is: do we jump in now in Fear of Missing Out (FOMO) amidst this current 'boom' ? or should we sit on the sidelines and wait for prices to fall back/crash?
The short answer
No, it's not too late, but you need a very clear strategy, and thorough property and financial analysis to ensure you make an investment that will work for you in the long run.
What's happened recently?
There are big regional variations in property price increases, with London seeing an increase in the year to February 2021 of 4.6%, while the North West saw a rise of 11.9%.
Property transaction numbers have now come off their highs. April 2021 residential transactions were confirmed at ~118,000, 36% below the March figure.
So what does this mean for you if you're thinking of investing? There are a few central points, each of which we will cover in more depth in future blogs:
Most forecasts are wrong - by a big margin
In 2020, the actual increase in UK property prices was +7.6%. Now let's look at the forecasts, all of which were produced after Covid-19 was confirmed as a global pandemic.
March/April 2020: Knight Frank forecast -3%, JLL -8%, CEBR -13%, Savills -10% (then -7.5% in June, then +4% in Sep). This is not to criticise the forecasters, but to illustrate how difficult it is to predict property prices with any level of precision.
This means that we should only use forecasts as a general guide, and not the sole basis for any investment decision.
Many fundamentals & policy initiatives point to strong growth
Amongst the Government/central bank supportive actions:
Quantitative Easing (QE=creation of money by a central bank to buy bonds) - unprecedented levels in the UK (2009 - £200bn, 2020 - £450bn - more than all previous QE put together), has historically resulted in lower bond yields (cheaper debt) and therefore higher asset prices. Previous bondholders now hold cash, which will go into assets (including equities).
Significant increase in government spending on Covid support mechanisms (furlough, job retention scheme, business loan schemes, kickstart scheme, etc).
Stamp duty holiday - this has been extended through June 2021, followed by reduced rates until October 2021.
A new 95% mortgage guarantee scheme was launched in April 2021. This is designed to increase the availability of 95% Loan-To-Value mortgages.
In addition we have:
Low mortgage rates - some buy to let mortgages are availabe with rate below 2% p.a. It should be mentioned that these will not be available to every investor, and typically rely on a large deposit, but gives an indication of how cheap debt is at present.
Undersupply - An estimated 345,000 new homes are needed in England alone each year to meet demand. The delivery of new homes in 2019/20 was around 244,000, insufficient to meet demand, and placing upward pressure on pricing.
Savings - A large number of people have built up substantial cash savings due to lockdowns. According to the Office for National Statistics, there has been a £186bn increase in deposits over last year.
Property cycle position
This is a much deeper topic that will be covered in detail in a separate blog, but an 18 year property cycle has been observed in a number of markets. This suggests that prices increase and then crash every 18 years, taking 4-5 years to recover. A number of commentators have indicated that even if a crash were likely, it was not happen for another 5 years from now.
Inflation
With the unprecedented amounts of QE not limited to the UK, the prospect of inflation is again being discussed. As can be seen from the chart below, there is a wide range of uncertainty over the next 3 years, even from the Bank of England.
So does property act as a hedge against inflation? Well the answer is complex, but here is what we can say in summary:
Property rents can be increased in line with inflation, providing a hedge in terms of income.
The impact of inflation on house prices depends in part on whether interest rates are increased in response. The Bank of England rate was maintained at 0.1% in May, and it has indicated that it is unlikely to raise rates in the short term.
BellPepper's view - let's see what happened in 2008
For the reasons outlined above, we think property prices are likely to continue to rise for several years. However, we also thought, rather than trying to produce a forecast, it would be interesting to look at how an investment made just before the 2008 financial crash would have performed.
We have modelled a typical investment, with a 2, 5 and 10 year hold period.
Let's use Battersea, south-west London as an example, with a purchase in 2008. The average property price was £408,000. Prices fell by 2% that year, but then recovered by 2% the following year.
The path of prices was extremely volatile in subsequent years, but the main question is - what were the returns like after 2, 5 and 10 years? The table below gives the answer:
The cashflow is equal to the net rental income, while the profit on sale shows total pre-tax returns from a sale, including rent received*.
There are a few messages from this:
Have cash on hand to cover monthly/annual shortfalls. Due to low gross yields on properties in Battersea (averaging 3.5% since 2008), a typical property would see negative annual cashflows.
Selling early would have been a mistake. If someone had panicked and sold after 2 years, they would have lost £21k after transaction costs.
Holding on to assets can pay off in the long run. The strong fundamentals in Battersea, combined with an improving economy meant a strong increase in property prices over time.
Conclusion
We believe that on the current evidence, further rises in property prices are likely. This means that waiting on the sidelines is likely to result in lost opportunities for capital growth, compared to making a well-judged investment in a strong location.
However, the regional variations will continue to be significant, so doing thorough research on area, property type, number of bedrooms and intended tenant type will be critical.
Our overall advice is: a sound strategy is key. Ensure you can cover cash shortfalls, don't assume that you will be able to sell for a profit after 2 years. Finally, limit your leverage (Loan To Value ratio), in order to mitigate against any risks of income shortfalls.
The difference between a good investment and a great one is worth many thousands of pounds per year. The market is highly competitive, with the best opportunities being snapped up quickly. This is where BellPepper's personalised, rapid analysis can help you make the best possible choice.
* feel free to get in touch with us if you'd like more details on our calculations