11 Newsletter

PROPERTY TRENDS ISSUE 11

EDITORIAL

Welcome to the January 2019 edition of Property Trends the monthly bulletin that focusses on property trends for residential property investors, landlords and tenants.
This month we look at:

  • House prices prediction 2019 – are prices likely to go up or down?
  • The scary future for tenants – why tenants should be very afraid
  • The slow death of buy-to-let – BTL is dying but it’s not yet dead
  • First time buyers rising – FTBs are getting on the housing ladder in greater numbers.

Editor


HOUSE PRICES PREDICTION 2019

We are that time of the year when property people everywhere give their opinions on the likely course of house prices in the coming year. I am of course no different.

The general view of most property experts is that 2019 will be a year of uncertainty. The massive unknown is the outcome of Brexit. Will there be a relatively smooth deal or a chaotic “no deal” exit?

No-one knows…hence the widespread uncertainty.

But for some observers, and I am one of them, Brexit is simply one of several factors likely to affect house prices in 2019. There is a property cycle irrespective of Brexit and that cycle seems to be at the subdued stage.

If you believe in the 18 Year Property Cycle, we are at the mid-cycle wobble point – at which prices are generally weak. We have seen that weakness in 2018 – with prices in Scotland, Northern Ireland, the North and the Midlands generally rising steadily…and prices in London and the South East falling slightly.

In recent months, in those areas where prices have been rising, the rate of growth has been slowing.

The current state of the market probably has more to do with pre-Brexit factors than Brexit. In London, the fall in prices to negative territory in 2018 has a great deal to do with the 3% stamp duty surcharge, higher taxation of private landlords and falling yields – factors which have made it highly unattractive for foreign as well as domestic investors to buy property in the capital.

Across the country, according to Rightmove, asking prices are falling (down 1.5% in December). That seems likely to result in actual price falls in the coming months – unless there is a pick up after Christmas.

Further, the economy in general seems likely to face strong headwinds. The retail sector seems especially weak and the political uncertainty in the short and medium term can only weaken economic confidence.

Against this backdrop, it is hard to expect house prices to perform strongly in 2019.

Halifax is expecting a price rise of between 2% and 4% in 2019 – subject to a benign Brexit.

However my interpretation of a range of recent data is that such healthy growth seems over-optimistic – even if Brexit does not put a spanner in the works.

The signs are that those areas which grew in 2019 are likely to flatline at best in 2019. Those areas which fell in 2018 are likely to fall further.

Savills expects London prices to fall by 2% in 2019 and that seems realistic.

My feeling is that London will fall by slightly more than 2% and the South East will not be far behind.

Nationally I expect house prices to fall by around 0.5%.

That will be great news for would-be first time buyers, especially if interest rates remain unchanged or fall.

If you are hoping to take advantage of softening or falling prices, now is the time to work on raising a quick house deposit.

There are likely to be good bargains for first time buyers and others in 2019.

Dalton Barrett
Rebel Property Coach

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THE SCARY FUTURE FOR TENANTS

At the very time when fewer and fewer people are able to afford home ownership, the future for tenants seems far from bright… in fact it seems very worrying. 

If you are a tenant it is vital to consider two things:

  • Do you have a chance of becoming a homeowner at some point?
  • If not, do you have a plan to manage your future as a tenant to minimise the downsides?

Going forward, tenants will increasingly need to adopt a serious business-like approach to their accommodation needs, a bit like how people think about and plan their education and career.

Inherent wealth disadvantage

Your biggest disadvantage as a tenant is the inherent wealth deficit you will face simply by being a tenant rather than a home owner.

As a tenant you pay rent to occupy your home but you have no ownership rights. The capital asset which is your home belongs to your landlord, who will benefit from any capital growth.

Capital values can decline in a house price crash or downturn but the average value of homes has grown spectacularly since the 1960s.   

Rent is good news for your landlord, but not so good news for you. 

No large capital asset

By paying rent without owning the capital asset which is your home, you are simply paying for a roof over your head. 

If this lasts for a lifetime, the disadvantages will include:

  • Your home will not be a large capital asset which belongs to you (subject to any mortgage on it)
  • You will not reach a point where you have paid off any mortgage and have a large capital asset at your disposal for family, investment, business, leisure or pension purposes.

More people renting

The downsides of renting will have wider reach – the number of people renting is rising fast due in the main to the unaffordability of homes in many parts of the country. 

The percentage of households privately renting increased from13% to 20% in the 10 years to 2017 (DWP’s Family Resources Survey 2016-17).

Further negatives lie in the story of rent:

  • Apart from the occasional pause, rent is constantly rising 
  • In expensive parts of the country such as London, tenants are spending an increasing proportion of their earnings on rent.

In the 10 years to 2017 average rent per month increased by 19% (Hometrack). During the same period, average earnings per week actually fell from £463 in 2007 to £458 in 2017 (ONS).

Rents set to go on rising

The UK population is expanding fast, with the population set to increase by 3.5 million over the next decade (ONS).

Not enough new homes are being built…putting pressure on rents.

Most new accommodation being built is of the high rise type, with characteristically high maintenance costs…which will inflate rents, especially as blocks become older over time.

The move to “lifestyle tenancies” – where tenants make a payment which includes rent and an element for “services” such as bills, cleaning and recreational facilities – is also likely to inflate rents.   

The dangers of build to rent

There is also the rise of build to rent (BTR) where large private corporations – such as developers, insurance companies and supermarkets – will become major landlords but, unlike councils or housing associations, will not be obliged to charge relatively low social rents.    

If there is sufficient competition between BTR landlords, rents could be kept low – a bit like supermarket food – with corporations being prepared to make relatively modest returns over a long period. 

However, things could easily go the other way…continued shortage of housing could operate to escalate rents, worsening issues of rent affordability – possibly in a context of subdued wage growth and/or  constrained government spending on welfare benefits. 

Growing homelessness

The ultimate consequence could be the growth of greater homelessness and rough sleeping.

Homelessness has been increasing in recent years. 

There are 320,000 homeless people in the UK (Shelter), 4% higher than last year.

The number of rough sleepers has grown for 7 years in a row according to Shelter.

If you have any chance to become a home owner it makes sense to make that chance a reality.

Being a tenant offers the benefit of flexibility and in many cases it is cheaper than homeownership in the short and medium term.

Long term however, the fact that rent is basically “dead money” lays bare the fundamental weakness of being a tenant.

The future for tenants is scary; if you are a tenant and not scared, expect to be increasingly scared in the not too distant future.    

Dalton Barrett
Rebel Property Coach

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THE SLOW DEATH OF BTL

Anyone who thinks there is a bright future for buy to let (BTL) has issues with reality recognition. But is it really RIP for the investment of choice for the small guy over the last twenty odd years?

BTL is certainly less attractive than it was; it is less profitable and many investors are off-loading their units in quite a hurry – but it is not clear whether that is due to panic or just smart business sense.

One thing is clear…buy to let is under attack

Landlords getting out

There has been a sharp reduction in the number of buy to let loans being taken out since 2016, corresponding with Brexit uncertainty and a bunch of negative anti-landlord policies by a Conservative government of all things. 

Here are some of the headlines this year pointing to a continuing reduction of BTL landlords and BTL units:

  • Simple Landlord Insurance in a survey of landlords owning just one property, found one third were planning to sell up and exit the BTL market (surveys frequently suggest most BTL landlords only own one or two properties)
  • Ministry of Housing figures showed that there was a fall of 46,000 in the number of privately rented units in 2017, the first fall for 18 years – suggesting that landlords were selling off buy to let units at the rate of almost 4,000 per month
  • Data from UK Finance showed that 5,500 BTL mortgages were completed in March 2018, 19% fewer than the same month in 2017; in June 2018 the total was 5,400, 19.4% fewer compared to June 2017; in September 2018 the total was 5,200, 20% fewer compared to September 2017
  • A trends report by specialist lender Paragon found that the average portfolio size of its borrowers was falling.

For many commentators the reduction of  the BTL sector is simply a case of the froth being skimmed off.

A common view is that the people who are opting out are mainly “accidental landlords” – people with the odd property and with no intention to develop the levels of professionalism needed to be a landlord in a political climate where tenants are flavour of the month –  possibly the winning ticket for the political party wanting to form the next government.

The concerted attack on BTL

But it is not just accidental or amateur landlords who are turning away from BTL.

Serious landlords are also getting out or downsizing their portfolio to maintain profitability. It is hard to make a strong case for sticking all one’s eggs in the BTL basket.

The lion slayer is Section 24 – which is progressively slashing the profitability of non-corporate BTL landlords by reducing the tax deductibility of mortgage interest over a number of years,  starting from April 2017.

It is possible to escape Section 24 by operating as a limited company. But that is only possible at great cost for some landlords, and for others it is too expensive an option.

The stamp duty surcharge from April 2016, making BTL landlords pay 3% extra stamp duty, has been another kick in the teeth for BTL investors. 

The scrapping of the 10% wear and tear allowance for landlords has added to the pain.

In addition, tighter lending criteria and stress tests for BTL lending means that in many expensive parts of the country landlords have to put in deposits greatly in excess of the normal 25% in order to secure BTL loans, and in many cases it makes no financial sense to do so.

In the least affordable parts of the country, BTL is increasingly not a viable investment – especially in areas where rental returns are low.

Hounded by negative trends

There are a range of  negative trends piling up for BTL investors, including:

  • Greater regulation in general which has risk, time and cost implications
  • Growth of landlord licensing, both a hurdle and an expense
  • Extension of property licensing, both a hurdle and an expense 
  • Increasing running/management costs as the duties and obligations on landlords continue to pile up.

In addition, there are governmental threats which will put off many landlords including:

  • Planned mandatory longer tenancies – which will restrict the flexibility of landlords to deal with their properties
  • Planned letting fees ban – which could lead to higher management costs for landlords as letting agents look to recover their loss of income from landlords.

It is hard not to conclude that the direction in which BTL is going is downhill and laden with risks and dangers. 

Notwithstanding the doubts about the future of BTL, research by Sainsbury’s Bank in September 2018 suggested 9% of UK adults are interested in taking out a buy to let mortgage.

BTL continues to be a bright shiny object for millions of people – a worrying trend if they end up in the buy to let sector without carrying out thorough due diligence, taking financial advice and consulting with experienced buy to let professionals – throughout their BTL journey.

The threat of build to rent

For those willing to look beyond the surface, there seems to be a clear long-term plan on the part of politicians (the Conservative at least) to get big corporations into the housing market.

A particular favourite of the current government is “build to rent” (BTR) with corporations large and small being encouraged to provide huge numbers of rental units on long tenancies. 

There is every indication this will appeal to a wide group of large corporations including insurance companies and supermarkets.

The big UK house builders like Barratt, Taylor Wimpey, Persimmon and Bellway seem particularly well placed to excel at BTR.

The fact that the UK population is expected to grow by 3.5 million in the next decade (ONS) means the economic rationale for BTR to take off is super persuasive.

If BTR explodes in growth as seems very likely, and is coupled with yet more anti-BTL legislation, it will become even harder for ordinary BTL landlords to make a profit.

Dodging the bullet

Many BTL landlords feel that they have dodged the bullet by investing in various parts of the North where prices are relatively modest and rental returns relatively high.

However, the relatively modest level of capital growth in such areas casts doubt on the long term viability of such an investment strategy – especially if future governments were to turn their attention to grabbing a bigger chunk of the capital gains of landlords.

Lessening the risks

With it being difficult to make a strong case for BTL long-term, smart landlords seem to be moving towards diversification.

Many landlords are moving away from single let BTL units and focusing on more profitable alternatives such as:

  • HMOs
  • Serviced Accommodation
  • Holiday lets.

Others are turning away from strategies involving rental income and looking instead at making capital gains by building or developing and then selling on.

A favoured strategy is relying on permitted development rights to change from office use to residential use – a less risky and time consuming approach than having to apply for full planning permission.   

Some wise and ambitious BTL landlords are turning their attention to BTR.

Typically they lack the resources to build a large number of units but by building a modest number they can avoid the red tape and cost of Section 106, which effectively requires developers to make a financial contribution to the local area when receiving planning permission.     

Conclusion

If you look for properties in certain parts of the country, where there is an acceptable balance between rental returns and the prospect of capital growth, BTL can still be a good investment – at least for the next 10 to 20 years (subject of course to government policies). 

However the best days of BTL are undoubtedly behind it – and it seems likely to get harder not easier for buy to let landlords to succeed.

The shrewd ones will ensure that traditional, single let BTL units form only a part of their property investments, and probably a small part at that.

The successful landlords of the future are likely to be those willing to treat being a landlord as a profession, striving to achieve the highest standards, providing top quality “pro tenant” accommodation and forming great working relationships with their tenants – who should be seen as valuable customers and not “cash cows”.

More and more landlords are moving away from traditional buy to let and there is no strong reason to believe they are wrong in doing so.

Game over buy to let? It seems we are clearly moving in that direction…although we are still a long way off.

Dalton Barrett
Rebel Property Coach

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FIRST TIME BUYERS RISING

Despite numerous obstacles, including rising unaffordability in many parts of the country, the number of first time buyers continues to grow. But can this good news story continue?

One of the main reasons I started my property blog earlier this year was to help with the provision of helpful free information and resources for would-be first time buyers wanting to get onto the property ladder. 

It is therefore great to see that this year is set to be very good for first time buyers.

The dominant driver has been the fall off in buy to let landlords due to higher stamp duty rates, greater taxation of rents and stricter borrowing criteria – as well as the softening of prices in various parts of  the country.

The availability of home loans at competitive rates of interest has also been a big help, along with the government’s various Help to Buy initiatives.

The return of first time buyers

The credit crunch which impacted from 2008 dealt a severe blow to first time buyers – the number of them collapsing from 359,900 in 2007 to 192,300 in 2008.

2017 was an important year for the number of first time buyers. It reached a 10 year high of 359,000 after 6 years of growth – just shy of the 359,900 2007 total.   

From 2007 to 2017 all areas of the country apart from London and the north of England experienced growth in the number of first time buyers.

In London FTBs fell by 26%, with the average price of a home being a forbidding £422,580 – around twice the national average. The north of England experienced a drop of 5%.

Northern Ireland saw the highest growth of first time buyers in the 2007-2017 period – up 65%.

The improvement continues 

Indications are that 2018 has been another good year for first time buyers.

Earlier this year UK Finance reported that in May 2018 there were 32,200 mortgages to first time buyers, up 8.1% on May 2017.

In contrast the number of mortgages to buy to let landlords fell by 9.8% in the year to May 2018 – suggesting a correlation between the falling number of purchases by BTL landlords and the rising number of FTBs.

Third quarter lending stats from UK Finance show that the number of first time buyers approved for mortgages in London was 11,700 – the highest total since 2015

Research by Lloyds Bank released in November revealed that the number of first time buyers in Wales had reached the highest level since 2004 – with 7,791 FTBs in the first half of 2018.

Year-end figures for 2018 for the UK as a whole are expected to show further growth in the overall number of first time buyers.   

Factors favouring continued growth

There are a number of indicators that FTB numbers will continue to grow:

  • In the last budget, the government extended the Help to Buy equity loan scheme to 2023
  • BTL landlords are expected to continue exiting the market, allowing FTBs to step into the void
  • Unless there is a disorderly Brexit or no Brexit, the mortgage lending climate for first time buyers is expected to remain benign with no indication of significant interest rate rises for a number of years   
  • The Bank of Mum & Dad continues to help FTBs onto the property ladder, with parents expected to lend an average of £17,000 to children in 2018 according to Legal and General
  • Recently there have been signs of real wage growth since the 2008 credit crisis, enabling more FTBs to save deposits and secure the level of borrowing they need
  • A September 2018 poll of brokers for United Trust Bank saw brokers ranking the first time buyer sector as offering developers more opportunities for growth than any other sector over the next 3 years.

Parents stepping up to the plate 

Although (according to Legal & General) the total amount being contributed by parents to first time buyers will fall in 2018 compared to 2017, parents are assisting with more home purchases than ever… 317,000 this year – up 3% on 2017.

Further, parents are increasing their contribution in those regions where their help is most needed – especially London, the most expensive part of the country.

41% of buyers in London receive parental assistance with their purchase – more than any other region.

This helpfulness by parents should help FTB numbers to increase even  in the most unaffordable locations.

Conclusion 

Things remain extremely challenging for first time buyers: 

  • Homes continue to be less affordable taking into account average earnings
  • Deposits are getting bigger (astronomical in places like London)
  • The average age of first time buyers continues to rise.

However, there is every reason to expect the number of first time buyers to grow – especially whilst Help to Buy is available, mortgages are plentiful and interest rates remain at near historic lows.

When the economy goes into inevitable recession – probably sooner than experts are predicting – first time buyers may once again find it fiendishly difficult to get on the property ladder.

If you are a would-be first time buyer, it is probably not a good idea to delay too long before buying if you can afford to do so.   

Dalton Barrett
Rebel Property Coach

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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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2 replies »

  1. As we are now leaving the festivities behind us for another year. The hardcore truth must be faced regarding properties. Thank you Rebel Property Coach for awaking us to reality.

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