Property Investment Update
Dynamics: The dynamics of property prices and rental does not seem to be understood by most economists and mainstream media correspondents.
Willing Prices Down: Most newspapers make much of London’s very high property prices, willing them down at any opportunity whilst castigating the high prices and overseas investors that they blame on driving locals out of the city. However, anyone living in London will know that London has always been an international city where property prices have been double the national average – and its not much different in relative terms to what it was like 30 years ago – during the “Big Bang” liberalisation of 1987. At that time, a flat in Fulham was £90,000 whilst a flat in Liverpool or terraced house in Burnley cost £15,000. These days a flat in Fulham cost £450,000 whilst a terraced house in Liverpool or Burnley cost £75,000 – little if any change in the ratio.
Printing More Currency: One thing is for sure – government and central banks will continue to print currency to devalue it to create an illusion of wealth, GDP growth and to erode their massive debt piles – both public sector and the private individual and private business debts.
No Prolonged Deflation: There has never been a prolonged period of deflation – simply because Central Banks and Governments do not find this politically palatable. If there is a short period of deflation – a crash – then they will re-start currency printing.
Investment Property: An interesting story from Transparency International describes 80% of luxury flats in central London are purchased by overseas investors – mainly from China, Singapore, Malaysia and the Middle East. About 40% of these countries rank low on the TI corruption index. Of course most British people cannot afford these new build luxury flats, especially after the draconian buy-to-let tax increases, plus additional 3% stamp duty on second homes – and massive stamp duty increases on properties over £300,000. Can we really complain when these foreign investors are contributing so much in tax, jobs and infra-structure spending, plus these developments have 20% social housing, so if they did not buy these flat, then almost no social housing would be built. It’s incredible how anyone buying a property is chastised as someone taking from a local, rather than contributing investment funds to help solve the housing crisis. Its little wander why so few properties are being built.
Look Further Afield If You Can’t Afford Kensington: People complain bitterly how it’s not possible for them to buy a property in London. But if they can’t afford central London like most people can’t, they should look further afield. May be live in Kettering – you can still buy a house in Kettering 55 mins from London for £185,000. May be they should look at Dagenham where you can buy a studio flat for £170,000, or New Cross where a studio costs £210,000, just 1½ miles from central City of London in Zone 2. But when you challenge the average person, they turn their noses up at such options – they seem to want to live in Hammersmith or Kew where all their friends live, a very Middle Class choice. The bottom line is – many people don’t seem to want to put themselves out, they want the easy option and because of this – choose to rent and give their hard earned money to Landlords instead. Younger people need to learn to take a risk, live in a regenerating neighbourhood, take snobbery right out of the equation and buy assets that they can add value to as soon as they can, as young as possible. Its interesting how the mainstream media seem to think people have a right to be able to buy their own property – if you look back 30 years, 70 years, 150 years – no-one ever had a right to buy a property just for being a UK citizen. One has to work hard, save and invest – take a risk – raise finance – before being able to buy a property. Indeed it’s probably more difficult in 2017 compared to 1987, but its never impossible if you are determined enough and save enough. Its just that many people can’t bring themselves to cancel their weekend to Croatia and those Starbuck coffee twice a day – just to put this into perspective, working 220 days a year – and drinking 2 Starbucks a day will set you back about £2200 a year in after tax expenditure – you’ll have to earn around £3,500 a year to pay for the coffee!
Young Finding It Tough: Its true to say, because deposit requirements are so large, and borrowing is only possible on around 3 ½ times your income, most normal young people are priced out in London. Its rather unfortunate that most people rely on “the bank of mum and dad”. So this means fairly directly, the rich people get richer and keep the assets whilst the lower middle class and poorer people don’t stand much of a chance – they have to work so much harder to get onto the housing ladder and build equity – and it will tend to come far later after they have already lost a lot of value by paying rent to Landlords.
Wealthy Parents Help: Most wealthy parents realise how critical it is for their you offspring to get onto the housing ladder and start build their wealth – and indeed its probably the best investment they can do – starting the offspring off in property investment rather than building more wealth only for the Chancellor to steal it through Inheritance Tax, Stamp Duty, Buy-To-Let Tax and Pensions Tax – plus Capital Gains Tax and Income Tax of course, plus VAT, Council Tax and other taxes.
Trends: Some general trends which we think are important to understand are:
• The government through the Central Bank will continue to deflate the currency by printing
• Tax take by the government will continue to increase
• Its likely property will be targeted even more by the Treasury
• He government will not however tax enough to precipitate a UK house price crash
• The printed currency at ultra-low interest rates will continue to be investment by the super rich global elites in London property driving prices high
• UK citizens will see property prices continue to rise faster than earnings
• House renters and house owners will continue to need to spend an ever increasing proportion of their earnings on property – hence other things like expensive meals, expensive new cars and travel-holidays will be the casualties
• There is almost not chance that house building will ever keep pace with demand requirements
• Extremely high stamp duty will prevent people from moving home which will reduce house sales supply even further, especially in southern England
• The North-South house price divide will remain as ever – as population growth and jobs growth in southern England far outpaces northern and far western areas – a good proxy for the boundary is a line jointing the River Trent and River Severn passing NE to SW. Areas south of this closer to London will boom – especially with the Tories in power indefinitely
Elderly Own The Assets: It’s certainly true the bulk of asset wealth is held by the over 50 years olds in the UK – and many people point to this to justify how they believe increasing house prices are unsustainable. However what they don’t normally mention is that these elderly people eventually die and their assets are passed down a generation to their offspring. Since most wealthy elderly people have on average two offspring, it gets divided two ways and so the property cycle continues. If the house is worth £500,000 – that’s £250,000 to each offspring – and that’s enough equity as a down deposit on five buy-to-let properties or one bought outright in cash. The point is – the property wealthy is recycled and this keeps the property market going.
Numbers of Bright Foreigners: Another aspect is the shear number of wealthy young foreigners that settle in the UK – particularly in London. This also feeds through to property prices as these highly motivated business people want to buy super properties in the best areas. For instance, although Shoreditch in East London looks a rather depressing place, its full of young trendy hipsters that are working for high-tech start-up companies – and they will one day be fabulously wealthy and all want 5 bedroomed terrace houses in Shoreditch, Whitechapel or Hackney. If Shoreditch property prices doing rise long term – we’d be very surprized indeed.
Shoreditch One Way: The key for property investors is to see an area that is positively changing for the better related to an influx of higher paid jobs and businesses. Shoreditch ticks all the boxes and there are simply not enough new properties being built- particularly for less than £500,000.
We hope this Newsletter has give you some helpful insights in the UK property market. Our next Newsletter comes out on 1 April 2017. If you have any queries in the meanwhile, please contact us on