580: Brexit Property Investment Update – Rental and Home Building Crisis
Standstill: The housing market has come to a near standstill. The amount of properties being put on the market has dropped to almost record lows and the amount of new mortgages issued has also dropped around 25% compared with a year ago. So what does all this mean?
The Shock: Firstly the market became quite “hot” after the Tories achieved a majority in May 2015 and motored on nicely – then accelerated led by buy-to-let investors and second home owners snapping up properties before the early April 2016 stamp duty deadline – then the period of Brexit uncertainty started also coinciding with the end of the traditional Spring sales season – the property market started to slow down as it normally does moving into summer. Then we had the Brexit shock on 24 June – a brief standstill. Sterling declined 15% overnight which made property for foreigners 15% cheaper. Initially it looked like confidence had been zapped – with business and consumer worries from many quarters and this slowly subsided through to present – things are starting to get back to a new normal.
The New Normal: Most people think property prices will continue to rise, but at a far slower pace over the next few years. It’s early days but the post Brexit shock house price crash seems to have been averted. The Bank of England has done two things to boost confidence and demand, firstly drop interest rates to historic lows to 0.25% - knocking around £50/month off the average mortgage cost. They have also importantly pumped another £20 billion/month into the banking system on top of the £60 billion/month they were already pumping in – and encouraged banks to continue lending to businesses and mortgages. This seems to have stabilized a rather unsteady ship.
Negotiations to be a Disaster: What we have to expect is that the EU/Brexit negotiations will not go well for the UK. It is only in the interests of the EU Brussels machine to give the UK a very bad deal for three reasons: 1) they want to dissuade other member states from thinking about an Exit (or a Referendum on an Exit); 2) they want to try and change the UK’s minds – scare us into staying; 3) they are sick and tired of the UK – our requests - and want to punish us for wanting to quit – just like in a “typical divorce case”– negative human nature. The two lead negotiators are extreme “EU Federalists”. We cannot think of a scenario where they would want to give us a good deal. As the outcome of the deal starts to take shape and it looks bad – this will spook UK markets, with talk of jobs and offices re-locating and we think this will affect confidence 2017 through to 2019. For now, people are waiting and seeing. It’s fairly quiet because we have not enacted article 50 and this is unlikely until Jan-Feb 2016. We thing it will cut GDP growth to may be 60% of what it would normally be (if growth was 3%, expect 1.9%). Inflation rates will rise and import prices will rise, so people will feel worse off after a while. It’s possible interest rates will need to rise, but the Bank of England will try and prevent this because the government, public sector, private sector and mortgage holders would not be able to pay interest charges at significantly higher rates – so there would rapidly be multiple bankruptcies. Because of the population boom, economic momentum and a Tory government (with Labour in disarray) – plus foreign investment and lack of building – we see house prices holding up for now across most parts of the country – this also includes central London despite extremely high prices.
Benchmark: Just as a benchmark, in Auckland in New Zealand, average property prices hit £450,000 this month, and it’s not even the capital or a big international/global financial destination. Okay you get more home for your money, but you can still get a one bedroomed flat in Fulham in fringe-prime West London for £400,000 so it’s not totally out-with the global norm. Ask anyone from the Middle East – who understands the value of transport-amenities-shops-theatres-colleges and global excellence you get for that price, and they might tell you it’s a good price in London, not high.
Rents to Skyrocket: The amount of buy-to-let purchases has crashed to around 35% of February levels. Meanwhile rents have been coming down slightly in the last 1-2 months. Some people think rents could drop further as the economy slows. But we believe that a rental property crisis is just around the corner off the back of Osborne’s ludicrous and draconian tax grab off buy-to-let businesses. The reason why rents have softened slightly is because the small flood of rental properties bought between Jan-early April 2016 that are hitting the market. But by year end, this stock will have been rented out – then no further properties will be available then the rents will have to skyrocket as renters become desperate due to a massive supply shortfall by early 2017. This is not rocket science – it’s just market supply/demand and the law of “unintended consequences” when the government get involved in taxation in a functional market – to make it dysfunctional.
Lack of Rentals Just Around the Corner: The big issue has been and always will be the lack of rental properties – so what did the government do? Tax landlords to discourage them from supplying rental properties. I nasty tax grab on a small group of people they think non-one will notice – since there are not many landlord votes and they tend to vote Tory anyway. Perverse. Ultimately it will certainly hurt Landlords who are in business and have to pay tax on losses after expenses – crazy – but it will also hurt renters who will have less choice, have to pay far more – and the only way to make a profits will be to cram more renters into smaller properties thereby increasing overcrowding. Or Landlords will simply have to sell up – because this business is not viable any more. And most Landlords are not expecting large capital increases in property prices anymore – and in any case they are hammered by 28% tax, rather than 18% for other businesses.
Legal Challenge: It’s worth noting that the legal challenge of the UK Treasury will go to Court on 6 October for a 90 minute Hearing – when it will be decided whether the case against the Treasury’s draconian tax increases on Landlords can then go to the Supreme Court. All Landlord’s eyes will be on the outcome. The challengers are making the case that it is illegal to discriminate against Landlords in EU Law - and this distorts business and markets (of course we have not even sent the Article 50 Letter yet and will be part of the EU and its Laws for at least another two years). The case looks pretty strong. We look forward to hearing the result. Renters should also be interested – because if this tax goes ahead as planned - rents will have to rise as costs are passed onto customers and there will be far less properties to rent – both lack of choice and likely driving down standards as Landlords struggle to avoid heavy losses on small and large portfolios alike. Many Landlords might go bankrupt – thence tenants would be evicted during bank repossessions leaving properties idle exacerbating the rental housing crisis.
Crash in Building Levels: On the building side, we would like to highlight some shocking numbers. In the year before the Brexit vote 23 June, there were 10,000 housing starts in London. After Brexit, this number is now running at a meagre and shockingly low 2,500. Just to put this into perspective:
• The population of London is growing at 110,000 people a year
• Even to keep standing still – and not making any progress in solving the London housing crisis, 50,000 new homes need to be build each year
• The building of 2,500 new homes is 20 times less than required to stand still
• If anything, the increase in the population of is likely to accelerate for a number of reasons:
o European mainland economic and political woes
o Last dash by Eastern and mainland Europeans to grab a London job before it gets more difficult to move to the UK
o A realisation that by the time we leave the EU – it may be 3 years from now – and this might be enough years for mainland Europeans to be allowed to stay in the UK – one of the reasons why migration acceleration is more likely than deceleration
Lower Levels for Longer: As banks become more cautious in lending to builders – and builders become more cautious in starting new projects because of uncertainties in how Brexit will go – this will drive down building levels even further. The UK needs at least 350,000 homes built each year, but we are likely to get less than 125,000 – as planning, environmental, land and nimby pressures continue to build. Councils and Councillors don’t like building – it upsets their populations and voters. The infra-structure is creaking and Greenfield sites seem to be off limits. Don’t expect any large building projects to take off any time soon. Much needed new towns are pie in the sky.
Landlord Taxes Reduce Building: The Landlord buy-to-let tax increases have of course created an effect that it is now not viable to borrow money to buy new property to let out. This means builders are less likely to build small flats and low cost houses. Instead they will focus on building only high priced luxury houses and flats, something we see as a continuing trend particularly in London and Manchester. These taxes have just made matters worse. They will lead to less affordable homes supply.
Tightening: In summary – in London in particular – we see a further tightening of the rental and property market with prices of rents and property both continuing to rise as sales slow and less people move home. Stamp duty rises have curtailed people’s ability to move home – further tightening supply.
Boom in Extensions: There will be a boom in extensions, loft conversions, basement conversions and home improvements – again driven by the ridiculous taxation policies – with stamp duty discouraging almost everyone from moving home. Why would you want to hand the government £50,000 in stamp duty to move home in London? You are better off using this for a basement or loft conversion and staying put. This will mean less and less homes are put on the market – driving prices still higher particularly if there is not a recession and interest rates stay low.
Financial Bubble: Ultimately – sometime in the future, and we don’t really know when this will be – probably in the next 1 week to 3-4 years, this whole financial bubble will pop. Trillions of pounds and dollars have been created out of thin air – electronically – to prop up the financial system and create inflation. To give the illusion of some form of growth. We believe this will eventually lead to a massive economic shock – when gold and silver prices will go ballistic, but for now – bullion prices are fairly benign. If you add up the total debt in the world – and divide it by the amount of gold – each ounce of gold – instead of being worth $1300/ounce should actually be worth $65,000/ounce – if there is a wholescale economic collapse where people lose confidence in currencies like Sterling and the Dollar – then gold will quadruple in price at least. We will write more about this on another day.
Low Paid Jobs: Back to the UK economy and jobs, we all know that almost all new jobs are low paid zero hours contracts. Some couples a total of 4-6 jobs all paying low wages and young people are standing still with high student debts, high rents and low prospects. For first time buyers it’s a pretty bleak picture – particularly of they have £40,000 student loans hanging of their heads – and it seems Weddings these days cost £15,000 to 25,000 - crazy.
Graduate Jobs: Regrettably there are so few real staff jobs for new graduates that actually pay a decent salary – like £35,000 a year. With a 5 times earnings borrowing limit – that’s about £170,000. Now that’s just enough to buy a studio flat in SE London – that’s certainly what we would do. But alas, people can be very picky and don’t want to live in SE London, so they end up paying £1200 a month in rent to live in Hammersmith instead and spend money on holidays on Croatia instead.
Lodgers – Strategy: Our advice to all young graduates is to try your very hardest to buy a 2-3 bedroomed house or flat as soon as possible and let out two rooms to lodgers. In London, you would get £600 a month for each room at least, that’s £1200 and almost enough to pay for the mortgage. In Manchester – its best to buy a central 5 bedroomed terrace house for say £200,000 and let out 4 rooms to lodgers – each room can be let for £450 a month. That’s a gigantic £1800 rent a month which more than pays the mortgage – then you can renovate and do the house up – add value and then sell for a profit and move onwards and upwards through the property market to larger homes.
Help to Buy: Remember with the government’s Help to Buy scheme – you can secure 15% deposit, and only need to therefore save for 5% deposit. If you get a Help to Buy ISA – and save £12,000 – the government then top it up with £3000 as you buy your property. So anyone that can save £15,000 then get a fairly well paid job and buy a 2-5 bedroom home in London or Manchester will make serious money. Remember also you only have to give a one week notice to lodgers – they simply don’t have rights like normal tenants. If they are late with their rent, they can be asked to leave immediately. If you fall out with them because they don’t help tidy up or you have arguments – again – they are out. You can also have your friends as lodgers – you can have a house full of professional friends you have carefully selected – all very flexible – paying your mortgage. So forget the holiday in Croatia, the fun weekend with the boyfriend/girlfriend – you are better off getting a property and a lodgers asap as young as possible. This is the only way we can see young people getting ahead economically at this time. It’s a serious piece of advice and insight. And for all parents – you need to get your offspring to start out renting to lodgers as young as possible to get them ahead in life.
Investment Hotspot: Finally if you want a sure property investment hotspot or boom area, look no further than Cannington half way between Hinkley Point and Bridgewater. We have researched this area. It’s worth staying a fair way from the nuclear power station itself because of all the building work and people of course don’t like to live next to reactors – this area will have £20-£30 billion pumped into it in the next ten years. The main EDF offices are in Bridgewater – anyone that has visited the town will describe it as a pretty non-descript boring place albeit the smelly cellophane factory has closed at least. But half way between Hinkley Point and Bridgewater – an ideal location for wealthy French expats – is leafy Cannington – with higher end large detached houses. These are surely going to rise sharply in price henceforth after the announcement 16 Sept 2016. The rental market for company lets will be super. Difficult to see how you can go wrong. Enjoy!
We hope you have found this Special Report insightful and it helps as a backdrop to your investment decisions moving through 2016. If you have any queries or comment, please contact us on firstname.lastname@example.org