Fortune Favours the Brave

Landlords are probably familiar with the expression that ‘fortune favours the brave.’

Belief in this sentiment is certainly being challenged at the moment.

Property prices continue to fall and many landlords are bracing themselves for further falls. Predictions from leading commentators predict falls this year of anywhere between 10-15%
– see www.housepricecrash.co.uk

However, despite these falls, serious investors know that landlords who keep their nerve are likely to be the ones that are going to prosper in the longer term.

Landlords that remember as far back as the last property crash in the early 90’s will not be surprised by that. Some lucky landlords who had the foresight to purchase a London flat for say £50,000 in the 1992’s chilly market, according to the HBOS House Price Calculator would have a property worth £161,325 even with the falls in 2008. That’s a pleasing 222% gain in 16 years. Rents were much smaller, but the Bank of England base rate was a staggering 10% then. Those landlords who were sensible enough to have taken out a repayment mortgage and seen their investment property as a ‘cash cow’ would be well on the way to paying off their buy-to-let loan and still have a very valuable income producing asset.

Then and now

However, I would caution landlords and property investors who are eager to dive into the property market thinking that we have reached the equivalent1992 nadir . My caution stems from several reasons and essential differences between our current market and the 90’s slump.

Firstly, property values reflect several factors. Economic prosperity and confidence. We are currently moving towards possibly one of the biggest and certainly most sudden down turns / depressions experienced this century. Economic confidence will take a battering along with house prices. Many potential purchasers will be put off buying, even if they can afford it for many years, fearing further house price falls. This will subdue the demand for property and put a cap on house price rises for many years. Anybody who remembers the 90’s slump will recall that prices in London did not start to recover until 1996 a full 7 years after the start of the housing down turn, as potential purchasers stung by the experience retreated from the idea of direct property ownership and as the economy recovered from it’s slump.

Secondly and probably most significantly. We are experiencing an unparalleled global banking crisis. As most property investors realise the value of property is contingent on availability and price of credit. This means that even those potential purchasers of property who are confident enough to invest in bricks and mortar will struggle to get finance as banks and the banking system shies away from taking the risk on lending on an asset that has caused them so much pain. Restrictive lending and its’ high price means that a quick rebound in property values is not going to happen in the way some commentators predict. If we look at the 1990s for example banks who were stung by speculative lending on commercial property development restricted lending on all forms of property until the late 90’s when the buy-to-let initiative launched by ARLA in 1997 heralded a much more liberal approach. This time the restrictions are likely to be tighter and longer because of the severity of the crisis. In the early 90’s we did not suffer the phenomenon of the whole UK banking system facing nationalisation.

Fortune favours the brave.

With all this negative sentiment why the fighting talk you may ask? The undeniable truth is those ‘smug gits’ with their savings locked away in their fixed rate building accounts who never risk any of their capital have not suffered in the way that those of us who have their capital invested in assets have. However, with interest rate on deposit accounts barely over 1% then they will never get rich either. The reality is that investing in property is a great way of making money and lots of money for those investors that get it right. But those who invest know that investment is all about timing. The timing for property investment may not be right now but it will come and Property Hawk will be there informing landlords when and where to invest.

For those landlords who don’t believe the pessimism of Hawkeye have a look at the views of a true property optimist.

Are you a property investment optimist or pessimist?