The Death of New Build

So, what's this property investing all about, then?

When Mr Joe Average talks about investing in property, a curious thikng has happened in the last decade. Now the mental associations surrounding 'property investment' always seem to lead to newbuild flats in city centres, or dull housing schemes with weird layouts and bedrooms you couldn't swing a cat in. How did that happen? Go back 10-15 years and those associations just wouldn't be the same.

Partly to blame is New Labour and their endless tinkering, token policies designed to grab headlines and win votes but without any real thought of longterm consequence. They are not exactly known for taking the 'unpopular but necessary' political decisions, are they? The only way they would 'grasp the nettle' would be if the nettle was assessed by a team of Health and Safety Inspectors first, then a focus group, then make an announcement that the nettle was a misunderstood and discriminated against species and would not be harmed (or grasped) by anyone... Ok cynicism over, back to property!

Labour to blame.... why do i say that? because the Government needed to be seen to be bridging the gap between housing demand and housing supply, which was widening every year due to demographics. Trying to appease everyone (and helping no-one) seems to be a speciality of theirs, so they were stuck between appeasing two interest groups.

There were those decrying the lack of housing and the effect it was having on job mobility and the economy. And there were those who were green lobbyists and only wanted building on brownfield sites, and not ruin or natural heritage.

So what they did was give developers carte-blanche to build upward, charged with getting as many units per acre as they could, so the 'figures' would show what a great job labour was doing bridging the demand-supply gap.

Naturally, the developers took advantage of the Governments stupidity (and eventually the average amateur buy-to-letter). They wanted to squeeze maximum profit from these apartments, so they targetted most at the so-called 'young professional' who want the exciting City Centre buzz. So many apartments geared towards 'young professionals'... where did people expect all these elusive tenants to come from? And investors lapped up the false promises of rents and 'discounts'. Now these properties are falling sometimes by 30-50% or more. Many are ending up in auctions, as the repossessed landlords had no deposit invested in them, and couldn't stomach subsidising an asset which was now worth less than the mortgage against it.

My view is that these properties are probably finding their true market worth... the demand was never really a horde of young professionals (who, as soon as they hook up with a partner, or get bored of the city centre, will inevitable want a quiet terrace or a semi with a garden).

The other villains of the piece are the property clubs and investment gurus that sprung up to peddle all the hype and nonsense. The entire thing ran purely on greed, witness the incredible growth and rapid demise of 'Inside Track'. Where are all these newbuild gurus and property clubs now? (Well truth be known, probably counting their ill gotten gains in Puerta Banus...!)

So in a nutshell, the Government led the way with their weak policies, easily abused by developers looking to maximise gains. The media did the rest, creating the environment where property clubs and gurus of newbuild flourished, not just unchallenged, but heralded as geniuses. And not forgetting, the most important factor in the whole sorry newbuild mess was human psychology - believing something because 'everyone' knows it to be a good thing, and most importantly the twin sins of greed (the lure of an easy, overnight fortune) and sloth (being too lazy to do proper due diligence or educate yourself about property investing).

So has any good come out of this?

Not a lot, but there are several ways this has impacted the market which can be seen in a positive light.

Firstly, current house price statistics are led only by the figures that get reported by estate agencies, and what actually turns up on Land Registry. Why is that good? because the only people who are selling (apart from the odd lucky one), are doing so out of strong need and because it is a buyers market (not half!) - they have to take a terrible chip in price to sell. The other sales are forced - repossessions - and whether they go to auction or not, they are going for absolute buttons, newbuild more than any other, because now 'everyone' knows its a con and won't touch it with a 3 mile long bargepole. So these types of sales make up a disproportionate amount of the land reg and EA figures used to illustrate current house price trends. I think this distorts the actual picture of 'market value'.

Take an ex-council housing estate of 100 identical houses worth 100k on average at the start of 2008. Lets say at the end of 2008, ten people had their house up for sale, but no-one is buying, even when asking prices are lowered to 85k ish, because either new buyers can't get a mortgage or they are preferring to wait to see if the market 'bottoms out'. Lets be generous and say one person sold for 85k. Now in the same estate, another two people get repossessed, and their homes go for 70k and 67k respectively at auction. Answer me this - does this then mean, that when a surveyor charged with doing a mortgage valuation averages out his 6 month comparables (as directed by the bank), and sees the average price is 74k - does this mean that prices have REALLY fallen 26%? Conversely, at the start of 2012, if the media reports the recession is over, house prices are booming, and the same properties sell for 114k average - does this really mean prices have rocketted an incredible 35% in three years?

I would argue that this blinkered view, looking at the property market over very short spaces of time, is highly misleading. I'd prefer to look at this example as proving that property has probably just averaged out at 5% increase per annum, over 3 years, not bad while spanning a recession!

So I guess my long-winded point is this: house prices are being distorted by a disproportionate amount of repossessions and forced sales, and the steepest falls have been in newbuild apartments. But when making up the overall regional or national figures, the figures become skewed. Likewise, looking at too short a timeframe is not the best idea for a property investor - where real money is made by those who buy and hold for the longterm.

And the other point is, even when you do buy a property, the surveyors are being forced to be overly conservative, and so there is every chance that your property is actually being downvalued. So this can only be a good thing, as with our properties, time may well prove them to be even better bargains than they already are!

Over the last several years I have studiously avoided newbuild. Thankfully I am too cynical in nature and when handed a fancy brochure or 25 year old in a sharp suit tries to convince me 'i'd be a fool to miss out' - I start looking for the exit sign. I have always like the sort of property where normal people live. Solid 2 and 3 bed terraces, and 3 bed ex-council houses in estates that are predominantly now owner-occupied. The 'bread and butter renters' which will always find a tenant regardless of the economic climate, and when the market is good will always find an eager first time buyer (after all FTBers drive the market in the good times). These are exactly the sort of properties you will get from us!

And not all newbuild is bad, i must say. Like anything else, if it is solid, easily rentable, desirable to live in, and can actually pay for itself in terms of mortgage and management payments - then its probably a good bet, especially if you get it at a good discount. To that end, newbuild houses under 140k and apartments under 90k would probably interest me at the right discount. At the moment, some great opportunities are coming up in ex-newbuild, or even distressed developer sales. But avoid massive schemes where every second flat has both a to let and a for sale board up, and stay away from 'executive' apartments!

So, thanks again to newbuild (I guess) - for giving me much needed ammo to point out hyped-up house prices drops, and help me negotiate even better deals!