Property - why not wait until the market improves?
There are many reasons why now is a good time to invest. We all know the negative side - its rammed down our throats 24/7 - and as mentioned, its rammed down our throats by the media who have a vested interest in hype. And what sells best is playing on peoples biggest fears.
In this article I am not pretending to be an expert, but I hope it gives you a few things to think about and as a bare minimum - it is my chance to present a broader perspective on the what is really happening in the property market to counter all the doom and gloom. In fact, I would be very surprised if you did not finish reading this page without feeling at least a touch of excitement at the opportunity we now have in front of us. 2009 will be a massive 'window of opportunity' which may not reoccur in for decades if ever!
Here are seven 'reasons to be cheerful':
1 - The banks need to lend money!
Banks make money by selling money, no different to any other trader. The problem at the moment is that the property market is becoming distorted because normal people are struggling to get finance from banks. This 'freeze' is due to the banks deeply distrusting each others books. People want to buy, but can't! The banks need to make money, but there is an impasse! this situation is the core of the Credit Crunch and cannot last forever... and the signs are things are beginning to thaw. Not too quickly, I hope, as this is the main reason why I say we have a massive window of opportunity! The very fact that the Government will be forced to intervene if banks do not begin to 'defrost', means that people will begin to lend and the market will begin to recover. The banks will return to 'business as usual' (although not to previous irresponsible behaviour) - and the market will recover, and the window will disappear... So I for one am not in any great hurry for things to improve!
Another important aspect is that the loan to value is currently 75%, meaning the banks view the market as risky and want investors to stake 25%. They do this as the fear there may be another 10% fall left in the market, and are ensuring should they have to repossess at the bottom of the marklet, they will still have at least 15% comfort zone. The great news is that when the bottom of the market is in site or the lenders are reasonably confident things are beginning to turn the corner - 85% LTV will return (for purchase AND remortgage of course).
Even the gloomiest experts might agree that it is possible for prices to fall another 10%, then recover by 2013 to todays level. Even in that gloomy scenario - in 2 years, you could have got an asset with 25% equity, remortgage out 10% to fund other investments, as a contingency fund for your property portfolio, or to improve your lifestyle. And this for a property that cost you nothing, which has serviced its mortgage in the intervening years... It sounds fantastic when you put it like that - but the reason why this is even possible is because of the Credit Crunch and the effect this has had on banks and their lending criteria which has affected the entire economy and the public consciousness.
2 - The British psychology and its obsession with property ownership
As a nation it seems to be part of our DNA that we want to and aspire to property ownership. And it helps that most people are aware, if even vaguely, of the fact that more people have become rich through property as an asset class than any other. What we have now is an artificially constrained situation where people cannot buy due to the Credit Crunch, and so they are renting until they can buy. It is a bit of a fallacy to suppose that people have somehow 'fallen out of love with property'. There are many many potential buyers out there, limited due to the removal of high loan to value mortgages, or scuppered because lenders criteria has tightened up so much as to only let through the very 'squeaky clean'. This is great for landlords, as rents are rising, demand is high, and there are lots of good-quality tenants out there who would otherwise by first time buyers. The pent up demand will have to find its release, and when credit eases, I think many people (and especially the 'experts') are going to be shocked at the speed and strength of the recovery. When the easing of credit combines with the common (media led) perception of having 'turned the corner' - a very powerful human emotion will take over - fear. Not the fear we are experiencing at the moment, but the fear of 'missing out' or 'being left behind' - the same fear that helped to drive the last boom.
3 - Rising inflation
Rising inflation isn't generally viewed as a good thing, but over time this will help to erode your mortgage debt. So, if inflation rises the cost of everything will gradually go up. Over time, this will make property prices look low in comparison, especially in terms of a multiple of average income. Meanwhile, your mortgage debt will stay the same. This will help house prices recover in time.
4 - Low interest rates
This hasn't really helped BTL mortgages, since rates are always kept at a simalr levels - from 4% to 5.5% depending upon the product types. All it has meant is that the lenders make a bigger margin. As interest rates inevitably rise, their margin will reduce but rates will stay pretty much the same due to market forces. So don't worry too much about rising interest rates. They will only matter if you chose a tracker mortgage, or if your product tie-in ends and your are unable to remortgage onto a better product. In that case, you will be stuck on the banks 'standard variable rrate', which could be 3%+ above the BoE base rate. So our advice, choose fixed rates where possible, or buy properties where you are buying at such a discount, that remortgaging won't be a problem.
5 - Population increase and demographic trends
Despite many Eastern Europeans returning home or going to other parts of the EU as the Pound falls against the Euro, there are still at least 350,000 coming to the UK every year (according to Government figures, which don't account for illegal entry into the UK). The Poles that are leaving now, will be replaced by a new wave, as new entrants to the EU arrive. Another demographic change is that family size is shrinking in unit size but increasing in number. People are staying single longer, getting divorced quicker, leaving home sooner, and people are preferring living alone and independence rather than share with friends or family. Add to that, we are living longer and our health is getting better - which means many older people are living independently for longer than in the past, before needing institutional care.
6 - The widening gap between housebuilding supply and demand
Take the last point, and multiply it by the dramatic slowing down in housebuilding. Even 3 years ago at the height of the building boom, we were still falling short by 40,000 homes per year below the Government-set target of 200,000 new homes a year. That meant even at the housebuilding peak, a housing deficit was still building up year on year, which was made worse by the fact the Government figures were probably conservative anyway (since they didn't like to admit their complete inability to control our borders).
And remember the article in this section regarding newbuild? I pointed out that despite hitting certain targets, they were not building the 'right' sort of home. What this country needs is more entry level 3 and 4 bed houses, preferably with gardens - not highrise penthouses or poky 1 bed apartments in soulless developments with a hooker and giro-drop as your only 'neighbours'. So 60,000 of these 160,000 units actually built were newbuild apartments aimed at brochure investors, meaning we actually only built 100,000 of the 'family homes' that Gordon had envisaged when he gave the housebuilding industry license to ruin our city centres.
The Credit Crunch has made this fairly serious problem into an extremely serious one. Housebuilding dropped dramatically last year, and this year won't reach 90,000 starts. The reasons is simple, nobody can get a mortgage, and the wrong types of sites are the only ones getting planning permission. Something pretty dramatic is going to have to happen, and because of the apathy and short-termism (getting to the next election) of ANY government, those big decisions are going to be avoided like the plague. We are an extremely small and overcrowded island with the strictest building codes and fiercest greenbelt lobby in the world.... so the government will stall and stall and stall. The result? simple supply vs demand economics. When credit eases, and as the gap widens, property as an asset class will become more and more avluable - sowing the seeds of the next house price boom.
Its not America - with a trillion acres of land, lax planning laws, and house made of straw and cardboard (OK, apologies to any Americans, that was a slight exageration!).
Even worse is that it wil take a long time for the housebuilding industry to recover, since they need to develop fresh sites, get them through planning, slowly build up the workforce, get trust back from banks and investors in order to fund developments - and then reinvent their business plan, as i do not think many investors will be buying into mass apartment blocks anytime soon (althoug i could be, and probably will be, wrong!). So in another 5 years we may be back to the situation where we are only falling short of Government targets by 40,000 a year.... by which time there will be an insurmountable deficit.
So in conclusion - I hate to say it because it sounds a cliche - but i don't think there have ever been a set of circumstances so full of opportunity, as exist today - and it certainly won't stay like this forever!