Buying and selling for a profit used to be ‘easy’. Through the millennium you could buy a property and be guaranteed it would make money in a few years and in some cases, a few months. Some people (and mortgage lenders!) seemed to think house prices would continue to rise, others 英國物業投資 warned of a housing bubble, but didn’t seem to be able to accurately predict when it would burst.
However, burst it did, starting in the States and hitting the UK very hard. The recession appeared to start in the property sector and within months we saw sales drop by 50% prices fall by 20% from a 2007 peak. Rental income which normally rises when house prices fall, has suffered with year on year falls of 5% or more, voids have increased as have tenant rent arrears.
At the moment we seem to be in a strange state of flux. No-one seems to know what’s going to happen next. No-one can quite believe that such a sharp recession, within less than 12 months, can appear to be ‘over’. Yet, reports of green shoots in the property market and the wider economy seem to be talked about daily. The private sector is claiming their order books are growing again and recent figures even suggest unemployment is slowing.
But are things really starting to turn around? What about the huge debt we owe as a country, estimated at £13,000 per head of our population*? It is true that business has taken the brunt of the credit crunch and the public sector has yet to be heavily squeezed? If this is true, what effect would public sector job cuts and pay being frozen (or cut) have on our economy – and the property market – next year?
More importantly, as property investors, what does this mean for you? What’s the good news? What’s the bad news? And most importantly, if you have money to invest, are there any properties that are ‘safe’ to invest in? Are are short term profits from property possible, or is it only possible to make money out of property in the long term?
The good news
Many investors who had pulled out of the market back in 2006 (or before) have been buying heavily since October 2008. Those that bought within the first six months of the crash benefited by snapping up bargains from the huge over supply of property for sale and a massive rise in repossessions. Buying ‘below market value’ became the ‘favourite phrase’ of the property investment industry and canny investors were buying properties up to 50% below their true value.
The bad news
The credit crunch however meant that investing in these bargains was only for cash rich buyers as buy to let, commercial and development finance became difficult and in some cases impossible to secure. The return of 25% deposit requirements, higher finance costs and recently a dramatic fall in the supply of property in many areas has made even ‘below market value’ deals have, in the last few months been difficult to fund and find.
Added to the financing difficulties is the six month re-mortgage rule which stops an investor buying a property ‘below market value’ and then re-mortgaging it immediately to take cash out to invest in the next property. Although some still claim this can be done, most investment experts believe it’s only possible if during the process, someone commits mortgage fraud.
So, if you can access cash, is this a good time to invest?
Currently there are two schools of thought. The first believes that we are in an ‘artificial’ state of recovery. Interest rates are artificially low, help from the government is currently stopping repossessions and we have yet to see the effect of reducing public sector costs. As a result one school of thought continues to predict property prices falling further and staying low for some years as the impact of unemployment and a return to normal interest rates continue to depress the economy.
The second school of thought is that although low demand and supply is causing the current signs of ‘green shoots’, the likelihood of lots of properties coming back onto the market is small. Some predict that interest rates will stay low for many years (CEBR estimate interest rates will only increase to 2% by 2014). As a result, their predictions are that property prices will remain stable, and in areas where there is a shortage of supply such as the South East and London prices may even show small rises.
Whichever of these scenarios you believe will happen, one thing is for sure, that spotting the ‘bottom of the market’ is impossible. You will only know it’s been reached AFTER it’s been recorded! For example, for those hoping to pick up repossession bargains, latest statistics from David Sandeman at the EI Group show that the ‘bottom’ of the repossessions market (ie when repossessions sold through auction houses were at their highest) was Quarter 4 2008 – nearly a year ago!
However, good investors will always be able to make money – in good and bad markets. And, although you may have missed some of the bargains that have been around in the 12 months, there are still plenty of areas and properties that are worth considering investing in, as long as you’ve:-
1. Carried out extensive research
2. Considered different ways of making money from property
3. Accurately valued the property you are buying
4. Identified potential future capital growth
Research, Research, Research
In my view few people carry out enough research when buying an investment property, especially in unfamiliar areas. Those that don’t visit a property before they buy shouldn’t be investing at all, unless they have previously tried, tested and trusted independent people who carry out valuations independent of any property clubs or sourcing businesses.