There is no getting around the fact that in the UK property market, there is raucous competition. This article will help you understand the current state of the UK property market and what the effect of recent events has had on buy-to-let property around the country.
I will take you through some of the main risks that are involved when it comes to this market and highlight some key areas you need to consider, as well as some you need to avoid if you are thinking about investing.
Let's get started.
Buy-to-let properties, a risky business?
The first thing you need to understand about buy-to-lets is that they carry a lot of political/taxation risk. Recently there have been a lot of modern taxation changes that have come in that really hurt the buy-to-let market, which can make them a riskier investment for your net returns.
For example, you may purchase a £200,000 property and get a 4-5% yield on it. But because it's such a core return in terms of rental income, when you take into account void periods, taxation repair costs etc, you are almost entirely reliant on the value of the house going up.
This is especially the case if you are an investor who gears up (uses a mortgage to purchase buy-to-lets). It dramatically increases your risk and can put you in danger of losing everything.
You've got to consider that most starter houses for young families are anywhere between £150,000-£300,000 to buy and the divide between earnings and the value of starter houses has never been bigger.
Interest rates and mortgages - it wont stay cheap forever
But as the prices of houses have gone up, the interest rates on mortgages have gone down dramatically too. Back in your parents' day, the mortgage rates were obscene, like 10-15% interest!
This means that the monthly repayments your parents paid on a £40k house and your monthly repayments on a £200k house now aren't enormously different. In fact, as you are reading this blog, the Bank of England's interest rates are at 0.1% and most mortgages, if you have a decent deposit, are around 1-2% interest.
This is awesome. It means we can afford more expensive houses than we ever could have dreamed possible decades ago!
But there is an issue here too. The cost of borrowing potentially isn't going to go down. In fact, it's the lowest that it's ever been and as soon as there is a hike in interest rates, it's going to be very bad for those on variable rate mortgages.
The thing is that interest rates potentially have to go up. They can't stay where they are forever and when they do go up, so will the cost of borrowing.
Not as rosy as it sounds
You've got to remember that everything has bubbles; everything has highs and lows. Whether you want to call this a housing bubble or not, the price of houses cannot simply keep going up for everybody.
At some stage, there will be a reckoning. It could be in a month's time, or ten years from now, but at some point, there has to be one.
These days there are so many self-confessed property millionaires out there that spend their time coaching others how to borrow money. They teach you to leverage yourself up, have £20k a month income and a £19.5k mortgage to make money on property just because they did it 30 years ago.
Well, no one was doing it 30 years ago, bar a few. There was no competition, it could be argued that it was cheaper to borrow money, and everyone on the job made loads by converting properties. But now everybody wants to do it and property is seen as a safe investment – nothing is safe in investment.
Whether it’s properties, garden shed investments, classic cars or art, nothing is guaranteed to go up forever.
Personally, if it was that easy to make millions from property, i'd be doing it myself. I wouldn't have the time to spend in a Holiday Inn somewhere coaching 50 people how to make huge earnings and have an even bigger mortgage.
It's a big risk and so much of it depends on everything working for you. If the wrong piece of the Jenga tower comes out, everything is going to fall.
So, if you are considering buy-to-lets or worse, borrowing for a buy-to-let, things are not potentially as rosy as they might appear. The past is definitely not a guide to what can happen in the future, and the risks this decision represents could be massive. It may not happen instantly, but borrowing heavily to invest in something like a buy-to-let could potentially end up costing people their retirement.
The best example of this is the credit crunch in the late 2000s. It's that perception of something that has been safe for years (mortgage backed securities) being guaranteed to be safe for the future too – it's not.
There is a great film on this called "The Big Short", which is a fascinating watch for those of you interested in the subject.
Remember to diversify
It's the same as any investment really. As we have said many times in previous blogs, the secret to a successful investment portfolio is diversification. Having three properties and pouring all of your money into them is not diversifying yourself; it's not "safe as houses" as the old saying goes.
So, how can we know for sure whether the property market will continue to go up for the foreseeable future or will it come crashing down?
For that, we need to look at what factors threaten property, and what factors help the value of property. Things like rising interest rates, unemployment and rising taxation are all very real factors that will threaten the property market.
The past isn't a guide to the future
On the other hand, there are some key factors that help the value of property. For a start, we earn more now than we ever have before, which is good. The more money we have to spend, the more we can afford higher prices.
Next, the world’s economies are probably the strongest they have ever been, which is also good for property values. Populations are getting bigger, and the average life expectancy is going up too so perhaps there is more demand for houses than ever before.
So yes, there are a lot of factors that will help property values too, but personally, I can't see it continuing forever – it can't.
Think of it like this. Let's say you live in a standard three-bedroom semi-detached house that you bought recently for £350,000. If prices keep rising the way they are now, that would mean in 10 years your house would be worth £749,000!
Can you imagine anyone paying you that much? You have also got to consider the competition. How are many other houses just like yours are going to be built in the next ten years? And they will be newer and potentially cheaper too!
Competition is rife for all kinds of houses these days.
For these reasons, I don't think it's going to continue; at some stage, it has to stagnate.
A lot of people rely on their house because we have learnt from the previous generation that it's safe. We learnt that we don't need an expert, we don't need to do much for it and it makes us money. We have seen our parents pay £100,000 for a house that's now worth £500,000 and now they live in a £300,000 bungalow, happily retired from the extra income – amazing!
We think it is ultra-safe because all of the previous generations have done it like this and it's worked, so we do the same. But remember, the past isn't a guide to the future.
I hope this was useful. Feel free to email me directly for any further information at firstname.lastname@example.org.
The views expressed in this article are those of the author and do not constitute financial advice. Applewood Independent Ltd is authorised and regulated by the Financial Conduct Authority. For financial advice designed for you and your specific circumstances, please contact the author using the contact details provided in this article, or alternatively contact the Applewood Independent Ltd office on 01270 626555.
Your home or property may be repossessed if you do not keep up repayments on your mortgage.
Your capital is at risk you may get back less than you originally invested.
It may be difficult to sell or realise the investment, or obtain information about its value, or the extent of the risks to which it is exposed.
The value of property investments and income from them can go down as well as up and investors may not get back the amount originally invested.
As property is a specialist sector it can be volatile in adverse market conditions, there could be delays in realising the investment.