Guest Article from Robin Bowman: UK Property Investing – Is Now the Right Time?

publication date: Apr 14, 2009
author/source: Guest article by Robin Bowman, Property Secrets

So, that was it then.  The great property price crash of mid-2007 to the spring of 2009. ‘Britain's housing market reignited’, says one recent (and typical) headline.

‘Applications for US home loans surge’ reads another. Sales of new homes in the US bounced back from a record low in February.  They rose for the first time in seven months as buyers returned to the market. New home sales were up 4.7% month on month, after collapsing by 13.2% in January.

Back in the UK, the Nationwide price index rose 0.9% in March, the first rise since October 07. Even the prices of flats in Manchester’s city centre, which have utterly collapsed, may have reached bottom, according to auctioneers. And quite a bottom it is, with some flats selling at up to 60% off their peak value in 07.

Bank of England figures on new mortgages approved in February rose by 20% month on month.

So, are you convinced that the property market has reached the bottom?  We’re not.

What is possible though, is that we may now for the first time, be able to see the probability of what is ahead and this suggests that house prices still have some way still to fall.

The fact is that any upturn in asking prices, as reported by the Nationwide, needs to be put into context.  First, it’s only one month; second, it’s only asking prices; third, very few housing downturns show consistent month-to-month falls in prices.  This rise needs to be sustained to be meaningful.

The data from the US housing market, again, is interesting, but again, it’s one month and comes after a month that recorded a catastrophic low.

Most encouraging was the news from the Bank of England that UK mortgage approvals leapt by 19% to 37,937 during February. It’s a big leap in lending and not one that’s likely to be repeated month-on-month, but it does show that the single key cause of the house price crash, the drying up of finance, may have started to ease.

The context is this though, and it may provide a very worthwhile clue as to when the market really will reach its nadir. It’s been calculated that in order for property transaction prices to stop falling consistently, not to rise you understand, just stop falling, lending must increase by approximately 100% from its present paltry level.

Now, a jump in lending like February’s 19% just isn’t going to happen each month over several months.  But, if we assume a steady but more modest monthly rise – which again is somewhat unlikely – then the earliest we can imagine prices stabilising will be around the autumn.  But autumn is, traditionally, a dead season for property, so we’re probably looking at early 2010 as the most likely bottom of the market, and perhaps (just perhaps), some very, very modest growth.

There are some other telling factors to consider. Prices as a % of income.  Since 1983, data from the Halifax shows that rate to have been an average of 19.62%  In Q4 2008, it was a significantly lower 18.31%. Then there’s the house price to earnings ratio. Based on Halifax figures again, this peaked in recent times at 5.84 in July 07.  The long term average is 4 and last month it was 4.42.

None of this, of course, can be treated as an equation the result of which comes up with a definite forecast of when the market will stop falling. And anyone making forecasts about market bottoms more specific than our ‘probably around the end of the year’ one above, is either a fool or they’re selling something!  But, what is increasingly clear is that a further big collapse in prices is starting to look less and less likely.

For the investor then, especially the investor with equity, the greatest UK buying opportunities are probably from right now to the end of the year.

We say that not because we believe the bottom has been or is about to be hit, we simply don’t know with any certainty, but because we can start to see some added stability in the market that probably indicates that, while prices may still fall further, they won’t collapse again.

For the long term investor, and 10 to 15 years plus is now the only sensible way to view investment in the UK market, the risk of some moderate price drops over the rest of 2009 is of little concern.

Far better to buy an excellent property, with a healthy yield and long term intrinsic value than to try and hang on and call the bottom; or, indeed, to buy based ONLY on price.  The property that seems the greatest bargain based on price has got to that position for a reason.  Think of those hugely over-supplied Northern, city-centre flats.

But let’s not get carried away, there are still big clouds on the horizon. And while the credit crunch may have been the initial trigger for the price collapse, it has now caused a chain reaction in the economy. Unemployment and the fear of unemployment is now likely to prove the biggest drag on any recovery in the property market.

The Organisation for Economic Co-operation and Development forecasts that one in 10 workers in ALL advanced economies will be without a job next year with ‘practically no exceptions’. Hardly conducive to a dramatic upturn in the market.  But for the investor with sensible, long-term expectations, this is an opportunity knocks time.

More are seeing it that way too. The Association of Residential Letting Agents reports landlords are now buying more properties than they are selling for the first time in two years. 

The key hurdle for nearly all investors though, is not the economic argument, it’s that great property buys - property with long-term intrinsic value and healthy yields  - are becoming extremely hard to track down. With that in mind, here are some tips for those with buying in mind:-

• Look for locations in economically strong towns, those towns – or areas within cities - served by recession-resistant industries and businesses. Property here will not be the cheapest, but it will hold its price better in all points of the property cycle.

• Generally, avoid locations economically dependent on one industry or employer.

• Be cautious of everything, but especially oversupply of a certain type of property, rising unemployment locally and areas that have had a transient workforce due to the nature of the industries there.

• What to buy – this depends on location.  But good-quality, well-located apartments will do well (provided there is no oversupply in the immediate area). Larger, family suited apartments also.  HMOs (houses of multiple occupation) provide strong (but management-intensive) returns.  The supply of good quality HMO property has fallen off a cliff, or is being priced up, assuming a 14/15 year rent roll, so driving down yield.

• It may feel like stating the obvious, but remember that a cash investor now has negotiating powers that didn’t exist during the last ten years of easy finance.

• Forget all about Below Market Value in this climate. It is meaningless. A price from 2007 has little to do with today’s value.  Even a sale price of a few months ago is often no longer a valid comparable.  Focus instead on yield and long-term growth potential based on supply, economic growth and job creation in a property’s catchment area.

Guest article submitted by Robin Bowman, Property Secrets

Please Note:-
The views expressed in this article are of Property Secrets and not necessarily agreed with or supported by Designs on Property Ltd.


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