What does a house price growth slowdown mean for property investors?
According to the UK House Price Index from the Office for National Statistics (ONS), UK property prices are rising at their slowest rate since 2013. And a forecast from PwC says that house price inflation will remain at around its current level through to 2025. Sounds gloomy, but what does it really mean for property investors?
House price growth slows – but still above inflation
The latest data from the ONS shows that house price inflation eased to 3% over the year to May 2018.
The latest data from the government’s official UK House Price Index for May has revealed that average house prices in the UK increased by 3% in the year to May 2018 (down from 3.5% in April 2018).
As an investor in May 2017, the average property would have cost you around £219,000. In May 2018, its value would have increased to a little more than £226,000: a profit of £7,000.
Meanwhile, inflation is running at 2.2%. So, the rise in the average UK property price has beaten inflation. Again.
What does a 3% rise in house prices really mean for the average property investor?
While we’re discussing average house prices, it’s worth analysing what this means to the average property investor, who doesn’t pay cash for their property.
With a deposit of, say, 40% (or £88,000), had you purchased a property in May last year you would have needed a mortgage of £131,000.
If you sold that property now, after paying off the mortgage (assuming it was interest only), you would be left with £95,000. That’s a profit of £7,000 – or a capital gain of 7.9% on your investment capital. This is something that the House Price Index doesn’t tell you, and one of the major benefits of leveraging in property investment – when you use a mortgage to invest in property, you make money on other people’s money.
The outlook for property price inflation is more of the same
Now, let’s turn to the PwC forecast for house price inflation through to 2025. They believe that the average UK house price will increase by around 3% per year through to 2025. They predict that the average house price in the UK will hit £285,000 by 2025.
Between 2017 and 2025, the average property investor will double their wealth.
So, let’s look at a property bought in 2017 as above. Let’s see what this means to the property investor, should house prices rise as predicted by PwC:
- They paid a deposit of £88,000
- They financed their investment with an interest-only mortgage of £131,000
- The property is worth £285,000 in 2025
- They sell, and after repaying the mortgage are left with a sum of £156,000
- They have made a gross profit of £68,000 (or 77%)
To put this another way, that savvy investor who bought a property in 2017, and merely benefited from the average rise in house prices in the UK through to 2025 (as forecast by PwC), made an average of £960 per month. With no need to get out of their chair. Think about that for a moment.
You don’t have to be an average property investor
As we’ve figured out, a savvy investor using a buy-to-let mortgage to ramp up their returns could almost double their investment between 2017 and 2018 if PwC’s pessimistic forecast of house price inflation comes true. But savvy property investors perform better than the average.
What the average house price inflation figure hides are wide regional variances. And the average is weighed heavily by London prices. The average house price inflation in May 2018 may have been 3%, but London prices fell by 0.4%. Meanwhile, other regions performed much better. For example:
- West Midlands house prices rose by an average of 6.3%
- East Midlands house prices rose by an average of 4.9%
In its analysis, PwC recognises this variation. It believes that London prices will be stagnant at best through to 2020, and then start to pick up, with the average rising to £509,000 from its current £478,000 (ONS).
Invest in a region that produces house price growth of 5% per year between now and 2025, and you could more than double your investment capital.
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