To give you an example of how much this question is on peoples lips, the amount of inquiries we are receiving has trebled and one of the first questions they ask is how will the Coronavirus affect their investment.
We have two types on client who asks the question, the first is a client (we will call them client 1) who has already purchased and wondering if Covid-19 will affect the price of their property, the second is the client (we will call them client 2) who is looking to buy and does not know whether to purchase now or wait 6 months.
For those of you who regularly follow our blog, news articles and webinars, you will know that we always state property is for the medium to long term not for the short term.
Answer.. this is largely irrelevant. The only time the price of your property is ever relevant is when you want to sell or remortgage it , up until then, the price has no bearing on your investment.
This a little more tricky as there are a number of variables we have to consider.
I personally feel the current situation we find ourselves in will actually spur prices on again, however, we will come to that later.
When taking out any investment I always advise that a client looks at the downside and if they can cope with the downside then it is more often than not worth moving forward, if you can’t handle the downside/risks then its a no go from the start.
So let’s hypothetically say that over the next 12 months the market dipped by 10%. If this was to take place we have to work out the real value and what the downside would be. It’s not as straightforward as would buy a property now for £200,000 and pay £180,000 in 12 months therefore saving £20,000. There are other factors you have to take into consideration.
First of all, by waiting you would not receive the income that would have been generated from the property. So if we take an average of 5%, you have to take into account you will be 5% down from this.
Secondly mortgage costs. Based on a £200,000 property you would be borrowing £150,000. Now we have just had a rate decrease of 0.5 which I expect to be passed on to borrows over the coming weeks. If you wait a year, the virus is over and then rates get put back up you would be costing yourself 0.5% per year. Based on a 5 year mortgage which the majority of our clients take out, you would have cost yourself 2.5%
So far that is 7.5%. We also have to take into account the Stamp Duty increase which is set to be introduced for overseas clients in 2021. This is 2% so suddenly an overseas buyer would lose out on 9.5% (mixture of income and savings). All in all, even if the property price did fall by 10% you would only be 0.5% out of pocket.
Now let’s look at the likeliness of all this happening.
Again, those of you who are familiar with us will know that we are always stressing the point that there are 3 main fundamentals which affect property prices.
- Mortgage rates and ease of obtaining
Over the years there have been many blips and political episodes all of which have dented consumer confidence but not had too much of an impact on property prices, 9/11, Gulf War 2003, Elections, Brexit and now Coronavirus.
The biggest dips we have seen in the late 1980’s and 2008 were both to do with mortgage rates and ease (or lack of it) of obtaining. But again we came through those dips and property prices are far higher even taking into account inflation.
Personally I think the property prices will rise, why is this you may ask. Well first of all it’s the supply of properties. With the virus taking hold many individuals are going to remain housebound so it is likely we will see initially a decrease in clients wanting to view and a decrease in clients wanting to put their properties on the market.
This affects renters. As renters start to come through the market they rely on the constant supply. One such supply is when owners move up the chain, vacate their property and decide to rent out their previous one.
So with the demand put on new build property which is currently completing I feel this will be an initial bolt of lightning.
The second reason is point 1 in the fundamentals, taxation. Due to the fact we have a weak pound means that overseas clients get a great rate and therefore are purchasing property far cheaper than they once were. In regards to the taxation side, Stamp Duty is set to rise for overseas investors. Now if the last Stamp Duty rise back in 2016 is anything to go by this was a bumper time for property purchases and indeed the prices increased dramatically on the back of this as clients scrambled to beat the rate rise.
The third reason I feel prices will increase is due to fundamental 3. This is the fact that mortgages are at an all time low in regards to rates and this is only set to get lower if banks pass on the recent decrease in interest rates. Clients will take advantage of these rates, secure a property and sign up for 5 years to lock in this rate. Again the more sales that take place the more developers see a trend and up go the prices.
Last but not least is the fact that there will always be investors and the reality is there is little other place to put your money. Savings rates are yet again at a low, the FTSE has been on a roller coaster over the last few weeks and it’s at times like this investors look at safe havens and the reality is, property over the years has proved to be the soundest and strongest vehicle for your money.