Buy Now or Pay More Later

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Happy New Year to all you property fans, many of you who are probably still writing 2016 on all your docs. This is a first of a series of short glimpses on my views and predictions for the UK property market in 2017.

2016 was an interesting year to say the least. A fantastic year for Trump, Farage and Theresa May and a disaster for the rest of the world. We had the Brexit referendum to which no one seems to know the implications of, the Americans have a new President to deal with, and to keep it on a home ground, we’ve got the Scottish who will go against the grain as a principle.

Recent months have seen the pound drop more than 20% in value against the dollar, the FCA has tightened rules on lending, the government has introduced changes to taxation against BTL landlord and property investors, and interest rates have dropped to their lowest levels since the Bank of England was established in 1694. So, all indications are that we are looking at a bleak 2017. However, it’s not all doom and gloom, and let’s see if we can find a silver lining to all this economical unrest.

Baron Rothschild, an 18th century British nobleman and member of the Rothschild banking family, is credited with saying that “The time to buy is when there’s blood in the streets.” He should know. This translates very well to these times of political uncertainty.

When we talk about property in the UK we really need to stop using averages and property indexes as frankly we have two property markets, we have Greater London and the rest of England. These are two completely different markets with different investors with varied risk appetites.

I personally tend to invest mainly in and around London with small investments made around the country and the simple reason for this is to create a balanced portfolio. I look at properties that I can rent out to sharers/students and properties with development potential. Both segments provide me with a high income and steady growth which is my criteria when deciding on where to invest my capital. London offers great investment opportunities and I often say that for every £ you put in to your home you make 2. The population of London is forever growing, London is a brand and this is very important when thinking about investing in property. Volatility is low and rentals are high.

Central London is a micro market in its own right, and the people that decide to focus their investments on zone 1 are getting either trophy assets or development opportunities, it is very rare that you will find a property in zone 1 of London that will actually give you a profit after paying of the mortgage/service charge/maintenance etc. My investments focus on zone 3 to just outside the M25, these properties are still at somewhat realistic and affordable prices and there is always the potential to add value in terms of extensions, conversions or other development potential.

Looking at the economics of the UK and the impacts this has on property we have 3 very important factors to look at.

  • Demand continues to outstrip supply
  • Property is now essentially 20% cheaper for foreign investors
  • Interest paid on mortgages are at an all-time low.

Taking these factors in to consideration especially the current price of the £ vs $, savvy investors from all over the world will pour funds in to the region purely on the basis that they are buying property at a discount. We have already seen this happen in Central London where recent years have seen massive investing from Russian and Chinese nationals. This makes London all the more attractive and will affect markets in different ways, some developments which are catered to foreign investment will put their prices up making them unaffordable for local investors, local investors will be forced to invest outside of prime locations, first time buyers and investors will move to look at investing further afield thus creating a ripple effect which will ultimately cause house prices in general to rise.

The general consensus is that the property market will dip further or even burst in 2017, but I find little evidence to suggest this within London as London is a landlord/investor driven market with over 60% of properties owned by BTL investors. The recent tax changes have really gone out to hurt investors who own property in personal names. I don’t see this as a problem, simple economics will come to the fore front as landlords’ costs rise, they will increase rents, when all landlords increase rents the whole of market will follow suit, thus allowing investors to maintain yields. I feel that the Government’s decision on these tax rules will only end up affecting tenants the same people who are trying to get on the property ladder. Looking at the rest of the country I would say that vendors are looking at selling now to avoid any dips in the market and attempt to cash in and buyers are also looking out for these opportunities.

Having just come back from my Christmas break in Dubai, speaking to some ex colleagues from the international banking world, the sentiments are that foreign investors are a little pessimistic about the UK and that fundamentals will say that investors should sit on the fence and wait to see what happens, investors feel that the UK market will dip and correct itself. At the same time these same investors are looking at property at a discount and are stuck between a rock and a hard place.

We don’t know what Brexit will bring, nor what it will involve. The immediate effect seems to be a depreciating pound and a slowdown of the buying craze that defined the summer of 2016. Will it impact the property market negatively in the long term? I think not. Will Brexit bring on a massive demand for property? I think the impact of Brexit will help bring in foreign investment, whilst sellers of property are sitting on the fence with the over optimistic prices waiting for opportunistic investors to come forward.

Desperate sellers will always sell in any market, but with interest rates set to remain low, BTL investors and foreign investors are getting richer as they can raise the capital to continue spending. I feel that for those who want to get on the property ladder or who want to grow their portfolios will just need to dig deep, speak to the bank of mum and dad, look at alternative methods of financing and carry on investing. There may well be a dip in the housing market, and the house prices could fall further in the first half of the 2017. But property investing is not about short term gains, most people are in it for the long run, and the UK property market is only going one way and if you don’t buy now you will pay more, much more later.

 

 

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