Green Shoots – Time to Buy

Landlord who have been watching the landlordnews carefully will have seen that this week the Royal Institute of Chartered Surveyors (RICS) released figures showing that new buyer enquiries were at their highest level in almost ten years.
With the property market almost 20% down from its 2007 peak many commentators are suggesting that we are getting close to the bottom and therefore for those landlords who can get buy-to-let finance it could be time to consider buying.

Landlord insurance – time for professional rates – discounted

Property Hawk decided to look at the arguments for and against diving back into the property investment market.

FOR

There are some perennial optimists who see considerable opportunities in the current market.

Ajay Ahuja is one of those. A leading proponent of buy-to-let over the last decade he advises landlords:

"Forget what the experts are predicting. Check the yield, the positive cashflow you can get and the return on capital and compare that to what you can get from keeping your money in the bank. This should clearly tell you that now is the right time to buy!"

It is true that for those landlords that can get finance or do not need it will be able to buy property with cash have access to some extraordinary deals because of special circumstances such as distressed sellers or repossessions.

Property Hawk has always been a great advocate of seeking out real BMV opportunities through the auction rooms.

Landlords considering buying at auction will be interested in the latest import from the US. The Real Estate Disposition Corporation (REDC) promise to revolutionise the way property is sold at auction in the UK. Their business model which involves charging the buyer a 10% commission as opposed to the seller baring the cost has come in for some criticism from some in the auction industry. The traditional model involves the seller paying a 1-2% fee.

Their method of property auction also allows landlords to place bids online through a dedicated auction website. The next auction is timetabled for 23rd June.

AGAINST

There are many property and investment commentators who warn landlords about prematurely jumping into the housing investment market. There is a phrase amongst the investing fraternity about the dangers of investors trying to “catch a falling knife”. This refers to the attendant difficulties of investors trying to judge the bottom when a market is still falling.

Merryn Somerset Webb editor of Moneyweek has been one of the most accurate of the financial forecasters, correctly predicting the financial fall out following the credit crunch and then the devastating impact on investments across the board. She has been extremely pessimistic on house prices for several years and cautions landlords and property investors about being too hasty in calling the bottom.

She points out to property investors in a recent FT article
that the fundamental conditions may be wrong for a speedy recovery in the housing market.

“cheapness shouldn’t be measured relative to peak prices, but relative to historical trend prices. And, on that basis, UK house prices are still totally out of whack: they’ve still got a long way to fall to get anywhere near the usual 3.5 times average earnings. Look at the Land Registry prices and ONS numbers on average earnings and you will see that the ratio is still well over five times.”

“ A house that looks cheap compared with its 2006 price still looks very expensive compared with its historical average.”

David Lawrenson of Letting Focus is a long term property investor and also a buy-to-let expert is more cautiously optimistic. His view is that landlords need to be sensible where they buy. He reminds landlords that there is no such thing as a single property market. He does admit that he is now buying for the first time in 5 years.

“It is hard to call the exact bottom but we are near to it now I think (though unanticipated shocks like another Fred Goodwin type banking disaster or a flu pandemic could always put the tin hat on any recovery in prices.”

“Some regions and areas within them will do better than others. And houses will in general outperform flats. Some flat prices may continue to fall heavily in places where they are chronically oversupplied.”

“I have just started buying family houses in London for the first time in 5 and half years but it’s tough because the lenders are still rationing finance with outrageous fees, high deposit requirements and margins over base of at least 3.5%”

HAWKEYE’S VIEW

I’m starting to be a little more optimistic about the current market conditions as a basis for reasonable long-term investment. Remember I told landlords back in 2007 that the market could fall 25% or more.

However, I would caution landlords who feel just because property prices have dropped 20% that property is dirt cheap. It’s not. Landlords should see the 20% fall as knocking the speculative froth off the market. Property at these prices may start to have some real value but a landlord will have to research each deal separately to ascertain whether to buy. Remember the 3 pillars of buy-to-let.

Lessons from history

I would remind landlords about the lessons from history. Going back to the last property crash of the early 90s. Following price falls over several years, property prices reached their low point in December 1992 when the Nationwide house price index dropped to 99.84. During the next three years the index moved sideways and even by December 1995 it had only risen to 101.85. It was only after this time that house prices start to move up decisively. Within a year the index had moved to 110.52 and by 1997 it was up almost 25% at 124.58.

The lesson from this for landlords is that house prices don’t live in a void. They are a reflection of the wider health and confidence of the UK economy. With unemployment soaring by almost a quarter of million in the first quarter of 2009 and set to reach 3 million probably by the end of the year, the economy and its finances are in a mess. It will take several years to fix this.

If we use parallels from the last property crash there were three years of sideways movement before prices made any definite move upwards. Even if prices stabilise this year this takes us to 2012.

2012 – “fill your boots”

Here’s a scenario for you. Gordon and his gofers get kicked out next year. Cameron keeps his resolve, and subjects the UK to long over due cuts to its bloated public sector. After several years on starvation rations UK plc is out of intensive care.

Economies and house prices are built on confidence. Look at the last boom. To get things moving we just need a trigger event. Let’s think. A sun drenched London in the Summer of 2012 basking in the glory of world attention in its Olympic year. A feel good factor returns to the UK. The trigger for the start of the next bull run in house prices?

My advice to landlord is keep your powder dry unless you can find a real bargain. Pencil in spring 2012 in your landlord diary as the time to fill your boots with all the investment property you can afford.

Chris Horne – a unique perspective on property investing.