Is The Buy To Let Market Really DEAD?

So the question on everyone’s lips in regards to the property market and what we get asked the most, is that if the property investment market is dead. In this webinar we will look in depth at the state of the property market, what we expect over the short, medium and long term will be, what happened in 2008 and are we seeing the same signs, and of course how to purchase whilst still protecting yourself.

First and foremost let’s wind back to 2007, the property market had had pretty much 15 years of straight growth. Throughout the early 2000’s banks started to relax lending regulations so much so that many self employed individuals would be able to self certify. This is ludicrous to think now that you could walk into a bank, tell them what you could afford and get a mortgage on the back of it. Due to these relaxed rules, individuals who would typically fail stringent checks were able to get mortgages. After a number of years of these relaxed rules the interest rates started to rise. The combination of both of these was deadly. The clients who were struggling to pay back at 3% were now faced with mortgage rates of closer to 6% therefore doubling the interest they were paying back. As the affordability was not there, they simply walked away. This caused an issue with banks as they were fast becoming owners of a number of lower end properties which is not where they wanted to be.

The next phase of issues then took hold. As the lower end of the property market fell over this meant that there were less and less clients who could move up the chain so the next phase of the property market was also on hold. To make matters worse lenders started to tighten up on the regulations simply due the predicament they found themselves in. Due to the combination of factors, homeowners started to lower the price of their properties in order to attract a buyer and of course this travelled all the way up the market.

However, something else also happened, demand for rentals increased. As first time buyers struggled to get on the market and banks selling property off cheap, potential landlords caught wind of what was possible and started to purchase through banks/auction houses etc and the buy to let boom started. Over the next decade we saw property prices increase due to demand for landlords, this put more pressure on the rental market, therefore more clients invested and of course the cycle was self perpetuating.

So that of course has taken us to Covid and we have to look back at history to learn what is going to happen to the property market in the future.

Lesson 1

The first thing we can see in both of the past dips, is that when there is uncertainty, both on a macro and a micro level, more people rent. The reason being, is that first time buyers are typically the type of client who are more than likely to have uncertainty with their jobs, they therefore rent for longer rather than purchasing just in case. This is why more pressure is put on the rental market and typically in a city centre.

Lesson 2

Overseas buyers are always looking for a bargain. Something else happened in 2008, and this was that overseas buyers entered the UK market with a vengeance. They are constantly looking for bargains and now is probably when some of the best opportunities present themselves. This is a combination of two reasons. The first is due to developers offering phenomenal discounts, however, they are starting to get wise to the fact that the market is picking back up and these bargains are getting less and less, however, there are still ones to be had. Secondly the exchange rate is in their favor, take a look at the spreadsheet below to see how much overseas clients are saving based on the same prices.

Price of the property £200,000.00
Feb 2020 March 2020 July 2020 Saving in March Saving in July
Euro €240,000.00 €212,000.00 €220,000.00 11.67% 8.33%
USD $260,000.00 $230,000.00 $246,000.00 11.54% 5.38%
HKD $2,026,000.00 $1,808,000.00 $1,934,000.00 10.76% 4.54%
AED dh958,000.00 dh840,000.00 dh904,000.00 12.32% 5.64%

Now add another 10-15% saving on these prices and you can see that in March, clients who purchased during the height of the crisis would have made the best decision saving around 25%.

Lesson 3

Timing is critical, as you can see in the above example, although we weren’t to know about COVID, it has presented itself as a great time to invest. In fact, one thing we can learn from previous crisis points is that the best time to buy is when you are in the middle of them, not when things start to get better. Many clients wait until they feel more comfortable with whatever investment vehicle they are going to use, but by the time that has happened the opportunity has passed

Best time to buy the stock market over the last 20 years has been March 2003, March 2009 and it looks like that March 2020 was another opportunity to buy at prices which had not been seen for years.

In the property market the best times to buy were again during crisis points, 1989 & 2009 where you could have saved 15% on the previous high and it looks like March just gone was another one of those. Of course the property market is slower moving than the stock market so only time will tell how much lower it was in March to what it is going to be.

Lesson 4

Don’t wait, and don’t sweat the small stuff. As you can see from lesson 4 waiting can cost you money. In the case of the UK investor this can be 10-15% where there were discounts to be had and in the case of the overseas investor around 25% where there was a combination of a low pound and discounts. However, there is not point in looking back and seeing what you could have had, it’s all about what you can do now.

You have to ask yourself what is the cost of waiting and why are you waiting. Many people who we speak to are financially ready, they are just not emotionally ready. This is a bad combination because typically this means the money is in the bank doing nothing, in fact it is decreasing due to inflation. Whilst it’s doing this the client is getting emotional about when is the best time to get involved in the market.They feel by waiting they are going to save money, however, this is rarely the case.

What I have found over the last 2 decades of doing this is you have people that do, and people that regret. I genuinely have individuals who came through to us back in 2012-2013 looking for a property with £100k budget. That £100k budget at the time could have got them 2 properties in Manchester and from that spawned another 3-4 over the next 8 years by releasing equity. A number of clients did that and now have 6 properties all paying solid income. Some of the clients that missed out ironically still enquire about what is out there but they don’t have £100k anymore they have around the £70k mark as they have spent some of their savings. Now how costly was that decision. Two clients starting off with the same money one has a portfolio worth close to £1m (around £370k once mortgages are paid off) and they have been getting 8 years of income and the other has £70k.

If a client wants to wait I always ask the same set of questions:-
What % do you think you will gain from waiting
How long do you think it will take
What % income could you lose from waiting
Could the market carry on going up and what then
Typically the first answer is around 10-15%, the second answer is don’t know, the 3rd is around 5-6% and the fourth answer is yes.

My answer back is always, if we can get 10% off the price now, you start your income now, why would you not purchase?

What Has History Taught us?

History in the property market has taught us that economic factors have not affected the property market as much as the stock market. The stock market seems to have been more sensitive to outstide factors, take the bubble of 2000, the Iraqi war of 2003, the crisis of 2008 and Covid, dips have not taken their toll as much in the property market where during this time we have only seen one dip.

This is because the property market is based on fundamentals.

The three fundamentals are:

Taxation
Legislation
Mortgage liquidity and rates

Unless these are changing dramatically the property market keeps on chugging away.

So do we think it’s dead, certainly not, and despite all the fluctuations that may happen over the next 10 years, you are still making income year on year more than what is in your bank so why would you not invest?

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