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29: What’s my portfolio going to be worth in 2023?


02-19-2005

PropertyInvesting.net

 

Research by Liverpool Victoria Friendly Society predicts that the average house price will shoot from £161,940 to £600,000 by the year 2023. Meanwhile, the average graduate starting salary for a first time buyer will rise from £22,000 to £52,900.

 

PropertyInvesting.net has done some quick analysis on current trends. The above rise would assume a continuous 7.5% increase in house price per year – something that seems quite feasible on the face of it. Remember also that the average house price increase in the UK over the last one or two hundred years has been about 8% per annum. So this is on the long term trend.

 

 

So why and how could prices keep going up like this when inflation is so low?

 

1. Wealth Transfer to Offspring: As time goes on, more and more wealth is tied up in property – and the bulk of this passes from father/mother to offspring eventually. The portion taxed as inheritance tax will make its way via the government into services and public sector jobs. The passing on of large lump sums of cash to offspring means many people will have large cash deposits for homes – either after the death of their parents or through gifts before they pass on.

 

2. Higher Wage Income: Average wages (excluding bonuses) are currently rising at 4.5% in the UK – meanwhile unemployment is at a 30 year low and CPI inflation is running at 1.6%. In theory this means we are getting a massive 2.9% better off for this year. Okay, taxes are rising, but I don’t think its enough to seriously dent this 2.9% addition spending capacity. Meanwhile, borrowing costs are relatively low – with base rate at 4.75%. As time goes on, more of this additional income will be spent on property if housing supply remains constrained.

 

3. Housing Shortage: The population is forecast to rise significantly by the year 2023 putting additional strains on housing – meanwhile, there is a trend of reducing numbers of people per property as there are more elderly, widowed, divorcees and people choosing to stay independent and live on their own. The increase in holiday homes, pied-de-terre and second homes does not help the situation. There are huge quantities of empty homes at any one time – many of which are almost by design – going to stay empty. This puts additional pressure on housing.

 

So in summary, PropertyInvesting.net supports the model of house prices rising from £161,940 to something like £600,000 by 2023.

 

So what does this mean for your property portfolio? If your total portfolio is valued at say £2,000,000 today (typical portfolio of say 1 family home plus 8 buy-to-let flats in southern England) – it should be worth something like £7,350,000 by 2023 at 7.5% capital growth rate. Is it any wander that people view their buy-to-let property as their “pension nest egg”! I enclose some scenarios below for comparison:

 

 

Portfolio value 2005            Annual Increase        Portfolio Value 2023

£2,000,000                                 7.5%            £7,350,000

£2,000,000                                 5%               £4,810,000

£2,000,000                                 2.5%            £3,120,000

£2,000,000                                 10%             £11,110,000

 

Remember – this assumes you do not add to your portfolio. That’s why people hang on and view their property as a long term investment and if things go according to plan, you’ll see your net worth rise. And don’t feel guilty – you deserve this – because you took the risk and actioned it. No pain, no gain.

 

What I suggest you do it build a model whereby you generate income, then plough this back to build your property portfolio, then assume you continue to do this and have say a 2% capital gain each year. If you have yields in the 10% range, you will be staggered at your projected wealth.

 

As an example – take a scenarios where you start with a portfolio worth £2 million then start to purchase 4 bedroom flats for multiple occupancy for say £160,000 (at 2005 prices) in southern England (15% down, this costs a total of £25,000 cash) then let per room for a total of £1,400 a month – manage it yourself and have borrowing costs of say £750 a month, you should make about £550 a month profit. If you keep rolling this into more properties, and these go up by say 5% per annum, and you ONLY buy one extra flat per year from now until 2023, your portfolio in 2023 would be worth £12.1 million and your net income would be £10,400 a month – without adjusting for inflation (or rents going up). By 2023 you’d have about 23 flats with about 90 rooms – assuming that rental profit rises by 2.5% a year, your net income before income tax would be £14,100 per month by 2023. The more properties you buy, the more money you make! Basically – it’s a number game. Buy high income properties – this allows you to buy more properties that make more income and so forth. Capital value gain being a big bonus. Also note – in April 2006, when you can roll these properties into your private pension fund – you will not have to pay capital gains tax on future gains.

 

Rental Income: So if you buy 1 flat a year until 2023, start with portfolio of £2,000,000 gross value, and make £550 profit per month on each new property (existing portfolio break even only):

 

Rental Income 2023            Number of flats         Rental Increase        Scenario

Per month                         added from 2005       per Annum

 

£14,500                            17                          2.5%                      mid case

£10,100                            17                          0%                         low case

£20,100                            17                          5%                         upside

 

So what are you waiting for!

 

 

Any feedback – send to enquiries@propertyinvesting.net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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