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Have I missed the boat?

Prospective property investors thinking of dipping their toes into the residential property market, or those landlords looking to expand their portfolios might be asking; have I missed the boat? Well, as property prices surge to a record high, here are my thoughts on the property market, for what they are worth. Feel free to agree, disagree or offer your view.

Property investment is a game of 2 halves

Anybody investing in prime residential property markets such as London, with its booming rents and soaring prices must be thinking – “What down turn?”

But for those landlords who have invested out in the regions, outside of a few Teflon towns such as: Harrogate and Bath, must be thinking – “What house price recovery?”

It really is a nation of two halves.

London and the south east have secured fantastic prices, much of it propelled by international money. The political, social and economic uncertainty across the world (witness Egypt, Libya, China, Russia) has thrown the international rich onto safe havens such a London. To a degree the same thing has happened domestically with the Teflon towns. Blue chip UK residential owners have sunk their cash into prime property locations. Whereas, ‘the rest of us’, owning property in “real Property UK” have been left tied to the vagaries of UK buyers and a restrictive mortgage market – hence the market has remained pretty depressed.

Future property price prospects

Okay the market in the rest of the UK is starting to move. The Help to Buy Scheme appears to be doing what was intended, restoring confidence in first time buyers, to “have their own home”. This looks to be encouraging for house values in the short term. We know why the government are investing so much into kick starting the housing market – the economy is dependent on this shot of confidence, nothing lifts the bank’s balance sheets (of which we or the government are a massive shareholder) more than a growing property market.

Are property prices cheap?

We can see from house price graphs that typical property prices stalled or fell from the boom times. In many areas they are down by a good 20% in real terms, judging the Nationwide data.

A fall doesn’t necessarily make them cheap though. In terms of income multiples, first time buyers are currently looking at a 4.4 average earning compared to just over 2 at a low point at the end of 1995. Unless we are expecting average earnings to surge house prices are not actually looking very cheap.

The other factor that has a large baring on property prices is the replacement cost of building new property. There is demand for more homes. Increasing birth rates and a desire for people to live alone means there is strong demand.

Building more housing – costs

The build costs for an average property excluding land is likely to be about £1000 per sq m. In other words, a two bed flat will cost about £70-80k to put up. That’s without factoring in the land and site costs. Scarcer and scarcer resources mean that this cost can only go up. With Green Belt policies likely to stay tight, and the controls over land supply largely in the hands of a few developers, it will mean that development land prices will continue to stay high. The reality is that if we want to build more residential property we won’t be able to do it at below current market values. If property prices stall; so will new building development. The housing crisis will become an absolute disaster, no government can afford to happen.

Affordability – the 64 million dollar question

Landlords have been dining out on impossibly low interest rates and growing rents for best part of half a decade (no complaints from here). This isn’t going to last. Interest rates will increase to a more realistic long-term level. Say 5-6 %. At this level rental profits will start disappearing for many landlords which might bring back the focus on gaining profit from capital gains.

So will property price rises deliver?

This in many ways is the 64 million dollar question, so here’s my guess. The UK loves property. As long as people have money and access to finance we will keep on buying property. It is more than just an investment. For most people it probably has the biggest impact on their quality of life, bar none – so why not pay as much as they can afford for it. However, if we believe that big income/wage rises are over, and that Government will be keeping a cap on inflation, then at some stage property prices will have to reflect the reality of UK income and wealth.

House prices are still relatively expensive, despite recent falls, they should come down. In my view this will cap real time house price rises for decades to come. In 1993 it was very different. I felt confident to stake every thing I had on property prices going up. I was right, but it really was a no brainer. Now I am much, much, less certain.

I feel that house prices could drift sideways for decades, whilst successive Governments try and massage the faltering economy back to life. For landlords and property investors this means that might be forced to eek out returns through small rental profits and relatively small increases in values. It’s really going to be several decades of re-balancing incomes and house price values. This time I won’t be betting my house on the prospects of the UK housing market.

Have I missed the boat?

The short-term answer is no … but. Not the clearest answer I know. I would be cautious on London property; it is getting toppy, but if you believe the globalisation story will see the international rich getting exponentially richer then property prices could go to obscene levels. The rest of the UK however, is going to depend on much more mundane issues, such as growth in the economy, and off course economic confidence.

The reality is, the heady days of the property investing late nineties and early noughties will not be returning in the next couple of decades. Investors contemplating buying now should see property as a safe place to save their cash, aided of course by a nice bit of rental income. Those investors hoping to see a dramatic shifts upwards in capital values might be disappointed. The risks in my view are still to the downside. But hey, this view will never be popular with the headline writers. They are only interested in talking about a housing booms or busts.

Post your views on the prospects for residential property investment.

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