11 Newsletter

PROPERTY TRENDS ISSUE 10

EDITORIAL

Welcome to the December 2018 edition of Property Trends the monthly bulletin that focusses on property trends for residential property investors, landlords and tenants.

This month we look at:

  • The arrival of rentvesting – people are becoming property investors before becoming owner-occupiers
  • Homes taking longer to sell – what does that mean?
  • A Brexit property boom – likely or unlikely?

Don’t forget to let us know what you think of the trends covered each month. Are we identifying the right trends and giving them sufficient weight? Are there important trends we are not covering and should cover?

Please let us know your views using the “Leave a reply” form at the foot of this bulletin. 

Editor


THE ARRIVAL OF RENTVESTING

You heard the one about the people who own a property but are living in rental accommodation?  Why are they paying good rent to a landlord?

The answer is “rentvesting” or “rent-invest” – one of the newest property strategies around.

It is a trend which seems to be catching on in Australia in particular, but is well suited to any part of the world where house prices are increasingly unaffordable.

It is becoming more well-known in the UK. 

Typically rentvesting is about buying a place you can’t live in to expedite the time you can afford to buy a place you can live in!

It is where you invest in rental property while renting yourself – where it is financial or otherwise beneficial to do so. The tenant in your investment property pays your mortgage through their rent. You pay the rent of your own rental accommodation. 

It can be used by anybody but is considered especially smart for would be first time buyers unable to afford a property in their chosen location but able to buy one in a cheaper location, with a view to selling it at some point and using the proceeds to help with the purchase of a home.

They therefore rent as economically as possible and buy an investment property to grow income and capital – ultimately to be used as their deposit or down payment.   

In terms of a catchy description I like “own to own”.

The strategy should be distinguished from rent to buy where a tenant rents a property with the option to buy it for a fixed agreed price within a set timescale.

It is a strategy very similar to buy to let.

Of course, there is no reason why as a “rentvestor” you should only buy one investment property. In theory, the more investment properties you have the greater your income and capital gains – the faster you can buy your own home…if that is your intention. 

Benefits of rentvesting

There are many advantages to rentvesting including:

  • Accelerating the time it takes you to become a homeowner
  • Allowing you to take up a cheap rental option to boost your savings
  • Giving you excess rental income to save towards your deposit
  • Giving you a capital gain to put towards your deposit
  • Minimising the risk of prices accelerating beyond your reach where prices are rising in your preferred location
  • Giving you flexibility of movement if you don’t like the idea of being tied down as a homeowner for work or lifestyle reasons.

If you invest in more than one property you can multiply the growth of your income and capital gains.

You have the option to keep renting and carry on owning your investment units indefinitely. You don’t have to go on to buy your home if your circumstances or preferences change.

Drawbacks of rentvesting

Rentvesting has a number of pitfalls. Renting a property carries the fairly heavy responsibility of being a landlord with an ever growing number of statutory duties.

Fulfilling such duties involves learning, time and sometimes fees to third parties such as, letting agents, managing agents and lawyers. 

Issues can arise with tenants including non-payment of rent – which can involve expensive court proceedings with no certainty that you will recover the arrears.

If the tenant does not pay the rent you will need to pay the mortgage from your own pocket – putting a strain on your finances.

When you sell an investment property you will not be able to avoid capital gains tax by way of “private residence relief” or “main residence relief” – however you will be able to benefit from the capital gains tax allowance (currently £11,700: tax year 2018-19).

Section 24

Section 24 is the legislation restricting mortgage interest relief for non-corporate landlords from April 2017.

The effect of the legislation can increase your tax or even put you into a higher tax bracket, reducing the rental income available to you in real terms.

It is good practice to seek advice from an accountant as to the possible impact of Section 24 if you decide to take up rentvesting.

Future of rentvesting

There is every reason to believe rentvesting will become more known and widespread in the UK.

The large industry which has grown around property education and investing is always looking for a “new strategy” to pull in punters and rentvesting very much fits the bill.

It is well known that it is becoming increasingly unaffordable for people of average means to buy in certain parts of the UK; rentvesting could become a widely used way to accelerate savings and raise deposits.

Rentvesting may also grow on the back of changes in employment trends in the gig economy.

Increasing numbers of workers now want flexibility to be able to move around the country and even the world in pursuit of work or in furtherance of their career.

More relaxed and laissez-faire lifestyle choices may also play their part as individuals increasingly opt for the opportunity to select a flexible blend of work and leisure  – without being tied down by the responsibilities and constraints of being an owner occupier, especially one with a mortgage. 

Dalton Barrett
Rebel Property Coach

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HOMES TAKING LONGER TO SELL

Something a bit worrying is happening in the housing marketing and we are not hearing a lot of noise about it – however it is potentially a cause for serious concern.

Home owners everywhere should be taking notice…

In many parts of the country, it is taking longer to sell homes.

Nothing too dramatic is happening, but there is a clear trend overall.

The slowdown is not occurring everywhere in the country. As with most things to do with property, there is not a single market picture but several.

However the dominant trend is one of properties taking longer to sell.

Taking longer to find buyers

According to research by CEBR (the Centre for Economics and Business Research) commissioned by Post Office Money, homes are taking 6 days longer on average to sell compared to 2017.

It was hardest to sell in Blackpool where homes took on average 131 days, over 4 months, before a buyer was found.

In London, where prices are currently falling very slightly, the average is 126 days. For properties over £1m it takes 177 days to sell; with cheaper properties it takes 99 days.

If London figures are compared to 2016 the deterioration is marked. According to the City Rate of Sale report for 2016, it took 89 days on average for a property to sell in London (compared to 126 days now).

The top current performer is Edinburgh where properties are sold in an average of just 39 days. The average for Glasgow is a little higher at 48 days.

These figures are evidence that Scotland is experiencing good growth, with Scotland and Northern Ireland being the best performers in terms of house price growth at the moment according to the latest RICS market survey.

Properties in Bristol and Luton are taking longer to sell – 10 and 14 days longer respectively compared to last year.

In contrast properties in Belfast and Swansea are selling faster – 17 and 14 days faster respectively.

The countrywide slowdown by just six days, does not seem a game changer. However, the slowdown is building on a fall-back from 2016 to 2017 and the clear trend is that homes are not selling as quickly.

Houses are taking significantly longer to sell in London and the South (where prices are generally weak) compared to the North and Scotland (where prices are generally strong).

That is further evidence of a two speed property market commentators are increasingly identifying.

What is happening?

The fact that houses are taking longer to sell can be seen as yet another early warning signal of trouble for the housing market (think slower lending, fewer sales, less properties coming onto the market, the retreat of BTL landlords, fewer house starts, growing land banks, warnings from developers and of course the daddy of them all, Brexit).

The optimistic response is to conclude that the slowing is not great but the fact that some areas are not slowing means there is no cause for concern overall.

However it is hard to find reasons not to subscribe to the school of thought that says where London leads others follow.

The London picture is one of:

  • Big price falls (circa 15%) in prime central London over the last few years
  • Relatively few properties coming on the market
  • A capital-wide price fall of just under 1% this year so far
  • Homes taking longer to sell since the 3% stamp duty surcharge from April 2016 and the tax hike against non-corporate BTL landlords.

There is a lot of talk at the moment that the rest of the country is going to close the price gap on London. There are undeniable signs of that currently but whether it will continue is debateable.

The ripple effect

The ripple effect suggests London’s woes will spread north at some point, perhaps sooner rather than later.

If history is anything to go by, the negative outlook in London today seems certain to reach the north tomorrow – whenever tomorrow is. If there is a disorderly Brexit, which seems increasingly likely, tomorrow could be sometime next year.

One big unknown is whether the Northern Powerhouse is strong and entrenched enough to resist the negative drag of London more than in the past.

Is the house price cycle of the North uncoupling itself from the South? Is the North now in charge of its own property destiny?

There are many suggesting that could be the case but for others such a contention is completely barking.

What is very clear is a slowing of house price growth in all but a few parts of the country.

The North has outperformed the South in recent times but the current picture is one of slower house price growth in the country as a whole, including places like Manchester and Liverpool which have been seen as star performers. 

That could well be a prelude to prices falling significantly into negative territory in places like London, some parts of the South East and under performing parts of the North such as the North East.

Is it going to be bad or very bad?

The biggest question is how far prices will fall – with the South leading the way. Uncertainty is larger than usual with the momentous unknowns of the Brexit drama.

Viewing things through the prism of the 18 Year Property Cycle, we are apparently at the “mid-cycle wobble” stage so we are due for a downturn but not a crash.

With the last crash in 2008, the next crash seems around 9 years away. There seems no need for panic.

Of course Brexit could seriously disrupt the cycle.

Things could be very different after the 29th March 2019 – Brexit day.

Dalton Barrett
Rebel Property Coach

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ASKING PRICES GOING DOWN

Falling asking prices can be a tell-tale sign of an impending drop in house prices and falling asking prices are exactly what the Rightmove House Price Index for November 2018 has revealed. 

According to the index, asking prices fell by 1.7% nationally in November 2018 (equivalent to -£5,222) – the biggest monthly fall since 2012.

The 1.7% fall was preceded by a 0.9% rise in October, a 0.7% rise in September and a 2.3% fall in August. The November 2018 fall compared to a 0.6% fall in November 2017.

First year on year fall

The November fall made it the first countrywide year on year house price fall since 2011 – down 0.2%.

On a regional basis, the biggest fall was in Yorkshire & Humberside at 2.4%. The fall in the South East was 2.1% and in London 1.7%.

The London fall was expected to some extent as seasonal variation is typically greater there than other parts of the country.

On an annual basis the London boroughs with the biggest falls were Lambeth (-6.8%) Hackney (-4.9%) and Tower Hamlets (-3.9%). In a few boroughs asking prices increased – most of all in Hammersmith & Fulham up 2.8%, Bexley up 2.8% and Bromley up 2.1%.

In the North East the monthly change was -0.6%, the annual change 3.5% and the average time to sell 77 days.

In the North West the monthly change was -0.6%, the annual change 3.2% and the average time to sell 65 days.

In Greater London the monthly change was -1.7%, the annual change -2.4% and the average time to sell 71 days.

In the South East the monthly change was -2.1%, the annual change -1.2% and the average time to sell 66 days.

The average time to sell a property nationally was 61 days in October 2018 compared to 59 days in October 2017.

Average stock held by agents in October 2018 was 52 compared to 48 in October 2017.

What is happening?

The fall in November made it falls in two out of the last four months and the trend seems to be downwards. 

The fall into negative territory, though only by 0.2%, is important as the first of its kind since 2011.

The stats match up with the fact that properties are taking slightly longer to sell than a year ago (61 to 59 days)  and agents are holding a slightly larger stock of unsold properties (52 to 48).

The fact of homes taking longer to sell is supported by other data.

The Rightmove stats add to the growing number of indicators suggesting an impending national fall in house prices and not just localised falls in parts of the South.

In the short term at least, it is definitely more logical to predict a fall in prices rather than a rise.

Extent and duration of the fall

Of course the extent and duration of the fall cannot be known. However unless there is a disorderly Brexit or major economic upheaval, there are no compelling reasons to believe that it will be much longer than a year or two.

However the smart response is to hope for the best while preparing for something very serious – a downturn of up to 5 years and price falls in excess of 20%

Consider the pros and cons of selling before a crash.

The best decision for you will be determined by your personal circumstances and whether you intend or need to sell in the short, medium or long-term.

Practical steps

You should expect the worst and plan accordingly.

Here are some practical steps you can take to protect your position in readiness for a significant fall in house prices or an outright crash:

  • Ensure that you have a reserve large enough to meet your mortgage and other household expenditure in the event of being out of work for up to 6 months
  • Have funds ready to cope with an increase of up to 3% in mortgage interest rates
  • If you are on a variable mortgage rate consider moving to a fixed rate to give you greater certainty as to future payments
  • If you are a property investor encumbered by mortgages, conduct a thorough review of your portfolio, stress-testing it on the basis of interest rates increasing by up to 3% and non-receipt of rents for up to 6 months – putting contingency plans in place as necessary.

Conclusion

Falling asking prices are an ill wind; how long it will last or its malevolence is very much unknown. What is clear is the desirability of expecting and planning for the worst.

Dalton Barrett
Rebel Property Coach

Read other newsletters HERE

Read property blogs HERE

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DISCLAIMER: This bulletin, which is provided for information purposes only, is fully intended to be accurate but no representation as to its accuracy is intended. It does not provide legal or any other advice to be relied upon. All liability to all persons acting or not acting on anything in this bulletin is disclaimed. NOTE: Where you require advice to rely on in any matter, it is best practice to consult and retain a suitably qualified expert in the relevant field.


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