‘Summer of love’
Apparently fashion goes in 20 years cycles. If true, this means that we should all be attired in fluorescent coloured clothing and flowery ‘dayglo’. For those old or indeed young enough to remember – 1987 was the ‘rave’ inspired ‘Summer of Love’.
Just like fashion, economics tends to follow cycles. It occurred to me that maybe economics and more specifically housing economics is mirroring this fashion cycle and that we are at a similar point to where we were in the late 1980’s.
Twenty years ago the housing market had experienced a period of rapid inflation from the early 1980’s and affordability was becoming stretched. In fact according to the CML affordability was at the lowest point in 1990 when interest payments as a percentage of median income were a massive 26.5%.
Today following a series of interest rate rises using the same measure, it is still only in the high teens. However, there is no doubt over the last few months it is increasingly difficult for landlords, including me to finance their mortgage payments out of their rent.
This reminded me of what a struggle it was when I first became a landlord almost 20 years ago. Now just like then the media is full of stories about an imminent crash following the dramatic house price rises.
How realistic are these claims?
Why it’s different this time?
The boom in house prices 20 years ago was followed by a dramatic bust in the early 90’s with thousand of owners being cast into negative equity, often for many years. I spent eight years with a property waiting for it to recover its’ value.
Are we facing the same scenario almost 20 years on?
No I don’t think so. The difference now compared to then can be summed up by a little word; ‘stability’. Twenty years ago following on from a dramatic economic boom after the depression of the early 1980’s; an economic crash and rising unemployment sent shock waves through the housing market which caused one of only 3 falls in the housing market since the war.
The main reason why I don’t see things repeating themselves this time is that the economy is still robust, company profits are at record levels and unemployment low. There are no signs of the conditions to cause a dramatic fall. Whilst this remains the case it is hard to see such a ‘shake out’ of the market. Much more likely is the widely vaunted ‘soft landing’ as growth rates slow. This view leads me to think about the future direction of my portfolio.
Property as a ‘cash cow’
Ever since starting my portfolio I have stuck by an approach that has attempted to leave as little money in my investments as possible. Instead preferring to extract the capital to use else where. When I first started, this was a prerequisite as limited capital resources meant the only way of purchasing a property was to push things to the limit.
No longer do I need to do this. In looking at my portfolio I have realised that I should no longer bank on using property as a ‘geared play’ on a rising market. This is where you borrow money to buy an asset which grows in value and thereby gives you a much higher return on your initial investment capital (your deposit).
I am now looking to use my property investments as ‘cash cows’. This is using the regular income generated from rent to pay down the debt, so giving me ultimately a debt free asset.
This was how ‘old school’ property investing was done, well before interest only financing was even thought of. It has advantages. It reduces my exposure to rising interest rates and should secure my future capital barring a sudden collapse in capital values which I have already said is unlikely.
Therefore whilst we may end up with the fashions of 20 years ago, we should with any luck avoid the excesses of its’ housing market. Think of employing ‘old school’ property investing techniques as a way of securing your long-term financial security. To my mind, the desire for this never goes out of fashion.
HAWKEYE – a unique perspective on property investing