How will the upsurge of cash buyers affect property investors?

House prices in the UK are soaring. According to the Royal Institute of Chartered of Surveyors (RCIS), house prices are set to rise by 6 per cent in 2016.

This is despite the government’s efforts to address Britain’s housing crisis by limiting the profitability of buy-to-lets with stamp-duty hikes and providing extra funding for developers.

The reason is simply that the demand for property has been increasing in recent months and house building does not exceed demand. The properties for sale on the market are at a record low. In a vicious circle, this situation drives up prices.

According to Shelter England, successive governments have failed to build a sufficient number of homes for the people in the UK. By 2008, the number of new homes being built had fallen to its lowest level since 1924 and has barely recovered since then. In 2014-2015 in England, there were only 137,900 developments underway in comparison with George Osborne’s promise to build 400,000 new homes.

This means home ownership is slipping out of reach further every year. On average, house prices are now almost seven times people’s income.

When people cannot afford to own houses, private renting becomes a good, and maybe the only, option for millions of families. In England, more than nine million people now rent privately.

This pattern is likely to persist, maintaining upward pressure on house prices in 2016, according to Martin Ellis, Halifax’s housing economist.

 

Who’s to blame?

Last year, George Osborne, the Chancellor of the Exchequer, announced that he was cutting the tax relief for interest payments on buy-to-let mortgages, and the Bank of England launched a review about tightening up rules for lending to property investors.

These steps were taken after the latest Financial Stability Report by the Bank of England which highlighted loose regulation of the buy-to-let lending sector as a potential source of house price inflation.

The aim was to level the playing field between owner-occupiers and buy-to-let landlords in accessing mortgage, helping to solve this crisis.

But are buy-to-let landlords really the reason for the housing crisis?

In 2007, The National Housing and Planning Advice Unit tried to isolate the impact of buy-to-let lending on house prices. They found that only 7% out of the total increase in house prices of 150% between 1996-2007 was due to increased lending to landlords.

Economists agree that shortage of housing, rising incomes, lower interest rates, a growing population, and the wider increase in credit availability are the reasons for the rising prices.

 

The rise of cash buyers

Robert Gardner, the chief economist of Nationwide Building Society, said that 38% of properties were sold to cash buyers during the first quarter of 2015.

According to Mr Gardner, the significant rise of cash transactions occurred in the wake of the financial crisis, where a tightening in credit conditions and a deterioration on the labour market limited the number of people able to buy with a mortgage.

Research by Hamptons International found that the total number of cash transactions in 2015 was 12 per cent higher than at its peak in 2007 while the value of sales was up by one-third.

In London itself, the number of cash transactions, without the needs to mortgage, has gone from 27 per cent in the first three months of 2012 to 38 per cent in the same quarter of 2015.

Older buyers are also contributing to the surging number of homes sold to cash buyers. After the new pension law, they can withdraw their pension to purchase buy-to-let investment property, debt free, as the new affordability rules have curbed the lending.

This trend is made up largely of pensioners who want to downsize their houses and will typically buy three or four buy-to-let properties with the extra money.

The cash buying trend is also prevalent at the top end of the market. Estate agent, Savills, showed that more than half of properties valued at over £1M were bought without any mortgage.

 

What does this situation mean to property investors?

Despite what could be taken as a gloomy outlook for buy-to-let investors, Brett Alegre-Wood, Chairman of Gladfish described the UK housing market as full of investment opportunity.

He explained that the government's commitment to building more properties will fuel a property boom and see a whole new group of investors ready to become landlords. The short-term indecision in the market right now will give way to the larger market cycle at play. Interests are still low, the market is buoyant and providing you stick to the usual rules of investing, things are looking good.

The upsurge in cash buyers is a by-product of low-interest rates and good growth in markets like London, commuter towns of London and many Asian markets that until now have avoided the global financial crisis. As volumes pick up and the market returns to growth throughout the UK, cash buyers will move to normal levels.

The advice from Brett is still to keep your credit clean, show a good income and you will find a mortgage. Even though there are more pages in the application and hoops you have to jump through, getting a mortgage is still as easy as it was in the pre-crisis years.

Green grass,

Susanna Ng

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