3rd November, 2016 buy to let
  • Economists can usually predict what, when, or how, but never all three at the same time. And whilst I am not an economist I will adhere to this principle and simply do the obvious and predict the “what”. 

    So here goes: property in the UK will crash dramatically. It’s unavoidable. 

    The BOE has driven interest rates close to zero which in turn always drives up property prices. Add to this cocktail of stimulation, government intervention in the market with the Help to Buy scheme, and prices are now higher than at any time in history on a price earnings ratio. Which in London and the Home Counties is 32 in contrast with a ratio of 3-4 historically.

    In my mind, this divergence from the historical trend poses a major price risk to the market. If that wasn’t bad enough, the economic landscape in light of the Brexit referendum, only serves to bring greater pressure to the market. Inflation, slow down in business investment and hiring, reduced foreign direct investment, and political uncertainty are all factors that increase the risks of owning investment property. 

    Eventually the music will stop and landlords will head for the exits. I don’t know when this will happen or what will be the final straw which sets the panic in motion. But I do know a major price correction, far greater than any pundit can or will predict, will take place. And the scale of the price correction will surprise everyone - as it usually does when a bubble bursts. 

    So here are a few ways to prepare yourself for the inevitable - whenever it occurs:

    1: Recognise that property markets - regardless of demographics, supply, or economic fundamentals - always return to historical trend. There has never been an occasion, in the history of capitalism, in any country, where prices which have deviated from trend have not corrected. If we recognise this, then we can prepare ourselves for the inevitable difficult times. 

    2: The old saying: in times of peace prepare for war. And in war prepare for peace, is just as applicable to property investment. Whilst interest rates are at historical lows, accept that at some point they will rise and usually sooner than any expert predicts. 

    Also keep in mid they will rise higher and quicker than any market pundit can imagine today. It is therefore essential that if you are heavily leveraged, you sit down and do the maths to see how far interest rates have to rise before you would be forced to throw in the towel and hand the keys back to the bank. Just remember, if the central back rates rise to 5% then mortgage rates would rise to something like 7-5%. So base your calculations on these figures or close to them. 

    If you discover that you’ll be underwater with rates at these levels, then you need to formulate an exit plan to prepare for this eventuality. Look to see if you can lock in your rate for 10 years or more. If not, can you raise the rent easily enough to cover the increase in financing costs? Failing that, how liquid is the market in your area to facilitate a quick sale without competitive market pricing?

    3: Understand that tenant supply can dry up quicker than you could possibly imagine. So keep a close eye on the vacancy rate in your area. A high vacancy rate should set alarm bells ringing because it means the supply of tenants is falling. Which could force you to reduce the rent you charge. That’s not a problem if there is a comfortable spread between the rental yield and your financing costs. But a small spread increases the risk of negative gearing. 

    4: Keep an eye on the Money Velocity figures. This is an indicator as to how fast money is moving around the economy. Any significant slowdown in the rate of velocity is a harbinger for bad economic news. And we all know that property markets do not thrive during economic downturns. 

    5: Keep an open mind to selling up ahead of any correction and investing in markets at the beginning of the property price cycle. Don’t hold onto your property for emotional or reasons of pride. At the end of the day, you are out to make money which align with your predetermined financial objectives. If it’s not going your way, or doesn’t look as if your objectives will be realised, then get out and find a market which can meet your long term plans. 

    6: Don’t listen or be influenced by any media reports or TV programmes about any property market. These channels of communication are lagging indicators and report what is happening as things unfold. You need to stay ahead of the curve. If the media were any kind of authority on investment and property, they would have predicted the equity boom of the 80’s and 90’s and the follow on property boom. Instead, journalists widely proclaimed the death of equities in 1979, just a few months before the boom started. 

    7: Always remember that banks are critical to a functioning property market. Andy slow down in the rate of lending has negative consequences for the property market. So keep an eye out on quarterly bank reports and share prices. Reduced access to financing from the banks usually spells a slowdown in activity or even a price correction. 

    8: Don’t be afraid to look outside your local area, or even toward another country for new property opportunities. Profit recognises no borders. So why should you. The risks do not increase the further away from home you own rental property. 

    These are just a few ways to prepare yourself for the coming crash. As I said, I have no idea when it will happen. But it’s better to be prepared than caught with your trousers down when it does. 

    by: Prime Asset Investments

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