Since the start of the new year, I’ve been focusing on the supply side (i.e. sourcing properties to buy) even more than usual as the number of properties coming onto the market has slowed, whereas the number of people looking to buy has increased, according to Rightmove
In terms of the status of the market, it is a very unique time for the property market in our opinion.
Therefore, much of my time so far this year has also been spent assessing the market (or sentiment thereof) to decide on a relevant strategy for 2019.
I’m afraid the tiresome Brexit debacle is the story that just won’t go away and is the controlling factor for all markets; but, especially, for the UK’s dominant property market.
Predicted scenarios per quarter in 2019
The sentiment is more negative than it has been for years, and there’s a lot of “wait and see” attitude around.
Properties to buy will be in short supply as sellers hold their breath for Brexit.
With the Brexit deadline having passed, the market breathes out and looks around the landscape. What is the true effect & impact? What truths and data come out of the divorce?
The market starts to make decisions based on the outcome of Brexit. With the true impact now known, the market decides to take action based on those truths.
This is very hard to predict until the end of quarter 2. Traditionally, buyers and sellers look to “complete before Christmas” so transactions and activity increases, although the direction of prices is very much dependent upon the sentiment at that time.
What moves what?
We believe that sentiment moves house prices; facts move rent prices.
What we mean by that, is fear & greed are more about unknown outcomes (future fiction), whereas the prices people can pay out on rent is very much based on true impact – i.e. how much they’ve earned for work already undertaken (historical fact).
Therefore, as prices move, so do investment yields. Yields are elastic depending on personal circumstances and relevancy. For example, if you’ve got ‘excess’ cash, you’ll be willing to accept far lower yields than someone who is trying to grow their cash. Similarly, if you’ve been used to gross yields of 10% plus, you’re going to stop buying when it reaches a certain point and seek the high returns elsewhere. If you’ve been used to 1-3% yields (such as in London), then the ‘lower’ yields of 5% in markets like Liverpool will seem incredibly attractive.
What follows is a further increase in prices as cash-rich buyers – anchored by relatively lower yields elsewhere – pile in and push out those who insist on higher yields.
While all this is going on though, rents are remaining stagnant. A 10% increase in rent does not make as much of a difference as a 10% increase in property price – and it’s certainly less likely will all this additional rental stock on the market competing for tenants!
So, that’s what WE think the MARKET-TAKERS thinks. But what do the market MAKERS think?
Due to Brexit – and the timing thereof relative to our last financial crash – we have a unique set of market indicators. Namely, historically low-interest rates AND a weak pound.
Using the truths & fiction theory as above, the interest rates are truths (action required based on historical figures) and the strength of the pound is based on fiction (the sentiment of future outcomes).
The consensus among market makers is that they are waiting to ramp up the pound against the dollar. But what does this mean?
If sentiment is currently negative (uncertainty of the true impact of leaving the EU) then the certainty provided after the fact – whether positive or negative – will result in better sentiment. Again, why?
If you know what’s going wrong, it’s much easier to know what to do to make things right. If you don’t, you cannot know how to fix something.
Knowing how to fix something gives you confidence. Confidence = positive sentiment.
So what will happen?
We can only do the same as everyone else – predict. A prediction is a fancy word for a guess. And action taken on a guess is a bet – let’s not forget that!
Our bet, therefore, is that once the true facts of leaving the EU – and how it has really affected our economy – are known (truthfully), confidence will return to the market.
We also bet that the actual outcome will be largely irrelevant to the sentiment itself. Just knowing the true outcome will give confidence – regardless of whether we are better off, or worse off, than before.
Finally (I hear you cry!), how will this affect the property market?
If the strength of the money in your pocket is worth more (the strength of the pound), and the money is cheap to borrow (low-interest rates), then it makes logical sense to borrow as much as you can (hopefully maintaining a sensible approach to debt-to-assets ratio).
If, then, borrowing (and therefore spending) increases, the Bank of England will pump the lever to increase interest rates to deter you from borrowing – and then spending – more.
As interest rates have been low for so long, an entire generation doesn’t understand how interest rates could ever be a constant 5% (and I find it hard to believe, as a 30-something) that interest rates were in the high teens when I was born. Because of this, the ‘anchor’ with which you view normality is the opposite way to the generations before me.
If the current generation is used to near-zero interest rates, then an increase has a massive impact relative to its interest rate. For example, a single point increase (0.25%) is an increase of 33% on the current 0.75% rate! As mentioned above, trends in markets are due to sentiment, so the effect of interest rates on the markets is very tightly correlated.
What are we going to do in 2019?
Buy, buy, buy. If the money in your pocket is low relative to historical data, and borrowing is very cheap – then borrow & invest. This is arbitrage or ‘stoozing’ in its simplest form. Use someone else’s money to invest for a return. The difference in cost (interest rate) and income (rent & capital gain) is your profit.
If only it was that easy!
We will be focusing on trying to find motivated sellers from a shrinking & stagnant pool of sellers. The crucial detail is to put yourself in a buying position (move to cash and get your finances in order ready for borrowing applications) so that you can strike while the iron is hot. In particular, many of those looking to sell before Brexit will be doing so because they have to, rather than want to. In this scenario, the speed & certainty of a buyer (you) is potentially more valuable than the price that they achieve from the sale. So lead with your best foot forward and make sure you can see through what you promise.
What about yields?
Property investors’ returns have been hammered over the last 10 years with changes such as the gradual removal of mortgage interest relief, landlord licensing, tighter regulation, and higher stamp duty. Returns from property investment are unlikely to return to the same level as they were previously. Does this mean you should forgo property investment in lieu of something else? In our opinion, a balanced investment portfolio should include property, equities (stocks), & cash, so yes – you would do well to continue with property investment. Further, the returns may have changed, but the fundamental reasoning for long-term property investment still remain. Having inflation erode your debt (mortgage) while increasing income (rent) is a strong way to build wealth and is still less volatile than the stock market.
Yields will be lower than they were before, but the combined yield of rent & capital growth, will always compound over the long-term and outperform most other investments – especially cash.
Just don’t try to ‘make a million from property’ overnight. Wealth is built slowly.
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