According to some we’ve just entered into the buy to let boom age and things are just about to take off. For the first time in a long time all the major house-price indices are showing positive growth month on month.
First time buyers are returning to the market, transaction levels are up, mortgage lending is increasing.
A natural confidence has come back into the market no doubt fuelled in large part by the Government’s Help to Buy Scheme by which, the Government effectively guarantee the risky end of a mortgage if a mortgage lender lends a larger amount. This is encouraging lenders to offer ninety-five percent mortgages and is once again making property accessible to buy for those who have been forced to rent for the last few years.
There are some who are saying that this will all end in tears, but in the meantime we are likely to see a feeding frenzy because the British public will only be denied owning property for so long. And the fact that the Scheme now applies to all property, second hand properties or pre-owned properties as well as new build properties, means there are few restrictions on who can apply and what they can buy.
That’s the owner occupier market but what has that got to do with the buy to let boom? Well, as demand from owner occupiers increases, house prices will increase, and many who have been considering buy to let, but have perhaps been putting it off waiting for the market to stabilize (it’s amazing how long the press have been telling us that the property market is about to crash again when in reality that was never likely to be the case) can now buy with confidence.
As the property market continues to improve, and is evidently doing so, there are many who would not naturally put their money into property who may now be tempted to do so. There are many people who are keeping their cash in the bank but, with interest rates destined to stay low for years to come, it will be more and more obvious to them that if they want to get a decent return on their money they are going to have to take it out of the bank and put it into a more tangible asset like property.
For the last few years non-geared returns on property have averaged around four to eight percent which is already a significant margin over the average return of a cash deposit in a bank which can be less than one percent, and not much more even in a structured saving scheme like an ISA. But if an investor knows what they are doing, and they are prepared to gear up (in other words borrow money to add to their own, otherwise known as take out a mortgage) then the geared returns can be two or three times the non-geared return, or perhaps even higher, depending upon what they buy, where they buy it and how they buy it.
Buy to let investors who bought property a while ago are already enjoying positive cash flow, and who are now seeing increasing equity. Equity can be defined as the difference between the value of the property and any mortgage held on the property, and so it is in a sense, “the wealth” of the property owner. Yes it’s true that this “wealth” is on paper only until they sell. But an alternative to selling is that, as prices rise, they can re-finance and take out that extra equity and use it as a deposit to buy another property and so increase their cash flow, or, if they really wanted to, they could spend it as tax free income.
The point is that existing buy to let investors need little convincing of the power of buy to let, and many current landlords have been, and will be, buying more properties to expand their portfolios.
I could go on and on, but the point is that there are multiple drivers in the market which are together acting to push demand and to push prices.
Then there are those who have their money in the stock market. It always makes me laugh when I see articles and headlines saying that the stock market has out-performed property over any given period of time. Let’s just put this into a sense of perspective. On December 31<sup>st</sup> 1999 the FTSE 100 stood at just under seven thousand. At the same time, according to the Nationwide, the average price of a house in the UK stood at around sixty thousand pounds.
Today, as I write, the FTSE 100 stands at six thousand eight hundred still lower than where it stood at the beginning of the millennium.
By contrast, today, according to the Nationwide, the average price of a house in the UK is now one hundred and seventy thousand pounds, almost three times the value back at the beginning of year 2000.
I rest my case.
In the meantime the stock market has been as volatile as any asset market and many investors could easily be tempted to move their funds into something more stable like property.
But before I finish my rant about the stock market just think about this. The companies represented in the FTSE 100 are changed on a regular basis. Well performing companies are brought in whilst companies that are performing poorly are moved out. This means that we are not even comparing like with like, apples with apples, and pears with pears. The house price indices do not move poor performing properties out and replace them with better performing properties. If the Nationwide decided that terraced houses at the moment were not performing too well but instead decided to calculate their index by bringing in better performing foreign properties, we would see that the index is completely distorted. I realise this is a ridiculous example but this is, in effect, what the FTSE 100 is doing.
If we were to compare the FTSE with property as the FTSE would have been if the poor performing companies hadn’t been replaced then I am sure that it would be at a much lower level even than the six thousand five hundred today.
So we can see that property has not only out-performed the FTSE three times over, but in reality it is probably more like four, five or six times.
As a result property is coming back into fashion. In fact, more accurately, we should say that it’s been in fashion but those who have wanted to buy property like FFBS just haven’t been able to raise the finance to do so. For different reasons the finance is now available again and the buyers are coming back into the market.
So if that’s all good where is the problem?
It’s difficult to define because the problem probably lies on several different layers. However, succinctly put, it is probably this: because the UK public has always been fascinated with property ownership, and because many of us are familiar with property ownership through owning our own homes, buy to let all seems a little bit too easy. In other words many buyers are lulled into a false sense of security and either think they know more than they do, or are careless about how they apply what they do know.
Put even more succinctly everybody thinks they are a property expert when in fact they are not. We know this because the results speak for themselves.
I know that when I started investing for myself I made a lot of mistakes which cost me dearly and which inhibited my progress. This was despite that I had professional qualifications in property.
As a Mentor and as an author I’ve been able to teach many others not to make the same mistakes I have made allowing them to progress more quickly than I did and with more confidence. But conversely I’ve been able to learn from the mistakes of those other investors as well. What I find interesting is that ‘experienced’ investors are just as likely to make mistakes as newbies– it’s easy to get into the ‘know it all’ mentality, and bad habits, once established, are hard to shift.