The experts got it wrong again, while property investors profit
Property investors have certainly had a roller coaster ride this year. Investment news has been a steady stream of hit after hit. Despite this, property investment in the buy-to-let sector is booming.
For months the media has been screaming negative headlines about property investment. In the lead-up to the budget, newspaper reports warned all readers that stamp duty and changes to mortgage tax relief would kill the buy-to-let market. In my investment research blog of the 4th of February, I told you that I thought this was “absolute rubbish aimed at creating sensational headlines”.
Investment news through July and August was full of doom and gloom after the shock of the Brexit vote was astoundingly demoralising. However, as I explained in my investment blog of October 10th 2016, there’s an excellent reason why property investors should never believe all they read in the newspaper.
In this article, I’ll look at the latest numbers, which prove the doom-and-gloom merchants have been wrong about property investment for months – again. Instead of crumbling in the wake of tax changes and Brexit, the buy-to-let market is going from strength to strength.
They said that house prices were doomed…
Almost all the experts, economic analysts, and journalists have been warning that the series of tax changes made by the then Chancellor of the Exchequer, George Osborne, would cause UK house prices to crash.
A June 2016 report in the Daily Mail warned that tax hikes “will knock 20% off house prices” and “deliver a major shock to London’s property market”. The article cited a report by Deutsche Bank, independent property expert Henry Pryor, the Royal Institution of Chartered Surveyors (RICS), and chief economist Simon Rubinsohn. Highlights of the forecasts made by these luminaries included:
- House prices will fall across the country, not just swanky SW1 postcodes
- Tax changes on buy-to-let are having an adverse impact
- 35% of landlords in London will sell up
- Fewer landlords to buy properties, causing a shock to the London market
The buy-to-let market was headed for the graveyard
The Daily Mail wasn’t the first to report the collapse of the property investment market. In August 2015, The Telegraph reported the ‘Death of buy-to-let’.
That article highlighted several landlords who were planning to pull the plug on their buy-to-let portfolios. The reason? The effect of the changes to mortgage tax relief and other property investment tax changes.
The article did a reasonable job in frightening the life out of all current and would-be buy-to-let property investors. It claimed that the effective tax rate on property investment would rise to 150% for higher rate taxpayers!
That Telegraph article also told the story of one landlord who had a £68,000 mortgage on an investment property worth £110,000. That landlord lets the property to an elderly couple at two-thirds of the market rate. The annual profit would fall from £1,100 to just £370. A new boiler that was needed would blow through the profit of £370. If you can’t see the landlord’s mistake here, then you probably aren’t cut out to build a portfolio of buy-to-let investment properties.
Along came Brexit, the final nail in the coffin
Before the EU Referendum result, George Osborne was warning that house prices would crash by 20% if the UK voted to leave the EU. Other experts were even more bearish:
- Fitch Ratings, the global rating agency (and one of the ones that totally missed the possibility of a global financial crisis in the lead up to the Global Financial Crisis of 2008) said that UK house prices would fall by 25% to ‘sustainable levels’.
- The Centre for Economics and Business Research forecast that leaving the EU would slash £26.5 billion of the value of UK housing by 2018.
- The International Monetary Fund announced that Brexit would trigger “sharp drops in equity and house prices”.
The experts couldn’t have been more wrong
I have consistently and constantly warned about listening to the experts when it comes to predicting house prices (and anything else). For example:
- As long ago as 2010/11 – House price predictions round-up: experts get it wrong
- In December 2015 – Property experts: embarrassing predictions, UK experts who got it wrong
If you want to learn about the market for property UK, and how to minimise your risks with proven principles and strategies, download a copy of my eBook “How to Predict House Prices” and stop listening to the ‘experts’ that consistently get their forecasts wrong.
Property investment is up
For now, here’s the reality about UK property investment since those expert forecasts and predictions of doom that I exampled above (Rightmove):
- Enquiries from people wanting to buy investment property have increased by 30% between June and September
- The numbers of new properties offered for rent rose by 6% across the country
- The numbers of new properties offered for rent in London have increased by 15%
Investment property prices are still rising
Down 20%? Down 25% Down 50%?
The experts who made those predictions must have been smoking something unsavoury, perhaps?
The latest figures from the ONS show something very different. According to actual prices being paid, the average house cost £3,000 more in August than it did in July. That’s a one-month rise of 1.4% in a month that is traditionally slow for sales. Year-on-year that’s an increase of 8.4%.
Even the Nationwide House Price Index rose. In September, its value was 0.3% higher than in August – that’s a rise of 5.3% year-on-year.
Whichever house price index you use, one thing is certain: property investment is still producing precious capital gain.
House prices to crumble and crash? Not on your nelly!
Why are property investment and property prices confounding property experts?
Most of the property investment experts that comment on property markets have never:
- Put a single penny into an investment property
- Bought and sold property for a capital gain
- Done the property research that real property investors do
- Run a two-year cash flow projection.
Without this most basic experience, how could these commentators and experts ever really understand the property investment market?
Here’s what these experts − who ALL predicted the collapse of the UK property market and buy-to-let property investment because of tax changes and Brexit − didn’t take into account:
· Incredible yield on property investment
Look, the gross yield on investment property UK is around 5%. That sort of income isn’t available in shares, cash deposit accounts, or government bonds.
· A history of incredible capital gains
House prices in the UK have increased by an average of around 8% to 9% for a hundred years. A property bought around eight years ago is now valued at double its purchase price. In less than 20 years, property prices have, on average, quadrupled.
· Supply and demand
Brexit would do more to reduce demand for homes than any other factor, is what the experts believe. They may be right, but what they didn’t look at is the numbers. If immigration came to a halt today, the current supply of houses would still fall way short of demand. And with house prices still rising and social housing stocks still falling, the growth in the private rented sector is likely to continue to grow.
These three factors make property investment a compelling strategy. But perhaps the biggest factor that the experts don’t understand (because they’ve never actually invested in property) is the ability of educated and experienced property investors to adapt their strategies for all market conditions and all market changes:
- An increase in stamp duty? Negotiate a lower purchase price.
- Reduced wear and tear deductibles? Be stricter with suppliers, tradespeople and tenants.
- Reduced mortgage tax relief? Pay a higher deposit, and use a mortgage broker to get the best mortgage deal.
Of course, these are just a few strategic ideas that property investors have started to use to maintain their advantage. If you’d like to discuss how to evolve your property investment strategy to minimise your risks, slash the impact of tax changes, and take advantage of the opportunity to make above-average income and capital gains from property investment, contact us today on +44 (0)207 923 6100.
Live with passion
Brett Alegre-Wood
