UK property: To buy or not to buy?

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Today’s main headlines again concentrated on the housing market uk and what could happen if interest rates rise. In fact over the last few weeks we have seen various experts and organisations air their different views on the future of the UK buy to let market.

The results from an Alliance & Leicester buy to let report concluded that the UK Buy to Let market is set to grow in value by over 40 per cent in the next decade. The reasons they gave were that the core market of renters (students, young professionals, and immigrants are forecast to increase in number and therefore increase demand. There is also a growing tendency amongst people to rent rather than buy as it provides greater flexibility and therefore job mobility. The Alliance and Leicester’s data actually shows that demand for rented property is growing steadily and that is being reflected in increased rental yields. They predicting the growth to continue, and Stephen Leonard, director, believes that "buy-to-let will become even more attractive to both existing and potential landlords".

Conversely, with house prices that are still rising at a fast rate, some experts such as Hometrack have warned that landlords are in for a prolonged period of compressed yields as rents are failing to rise at the same rate as property prices.

So the question is who do you believe?

Well nobody however many letters they have after their name has a crystal ball and knows for certain. But the fact of the matter is you have to do something to provide for your future. There are risks inherent in any investment and all the signs are that property will continue to produce far greater returns than other forms of investments such as pension funds and the stock market.

To a large extent it depends on what your buy to let strategy is. If you follow the strategy that we advocate, which is to build a portfolio at a steady pace, maximising the power of gearing (but without overstretching yourself) and hold the properties for 10 years or more, we believe that there is plenty of room for both capital and income growth and you will have no cause to regret choosing to rely on property for your future retirement.

“Housing Market Crash” headlines have been a regular feature of the British press over the last 20 years - as have AIDS, mad cow disease, bird flu, and any other crises they can help create to sell more newspapers.

There may possibly be some sort of “house price correction” at some point but if you understand the long term patterns and have a long term strategy so you never become a desperate seller - it simply doesn’t matter. Medium to long term we believe that the UK market will continue to grow steadily. As most people know, since 1952, house prices have doubled in value every 8 years. So regardless of any short term dips, property has proved itself to be far and away the best long term investment.

The government commissioned Barker Review estimated that by 2020, the UK will have to cater for an extra 6 million households. This means that:

· Based on the current rate of building homes, we would need to build an extra 120,000 houses a year to keep up with demand!

· The Halifax recently stated: the housing shortages are exacerbated by average annual rises in the population of 5% over the past 20 years

· Due to land use restrictions and a lack of skilled craftsmen, the house building industry has no chance of keeping up and increasing the supply of property

· Each year there is a large shortfall and by 2020 it is estimated there will be a shortfall of around 500,000 properties

· Based on that comprehensive report on the future of the housing market, this is why we believe investing in the UK is still a sound proposition:

· The average growth for the next few years may only be predicted at 4-8% (depending on which forecast you read) but it’s fairly easy to beat those averages and get a much better return simply by applying your knowledge about the property market. For example, buying in regeneration areas or other areas where certain triggers such as new industries, mean that demand will grow.

· The buy to let mortgage market in the UK is much more advanced than most other countries which means it is possible to buy using very little (even none) of your own money. For instance using an Armchair Investor Bridging Finance Product – it is possible to do this using none of your own money - if you are getting at least 15%+ genuine discount off market value.

· Even without using a specialist investment product such as bridging finance or deposit bonds, the deposits required on a residential mortgage are low so it is possible to buy a 100,000 pounds property with just a 5000 pounds deposit. If that property doubles in value over the next 8 years, you will have made 100,000 pounds for an investment of just 5,000 pounds – an ROI of 2000%.

· With regard to off plan property the deposits required to buy off plan in the UK are generally lower than overseas so again you can gain the benefit of capital growth with less capital expenditure.

· The UK market may be at the top of the growth cycle but if you are smart and buy property at 15 - 20% BMV (Below Market Value) you are in effect buying at the bottom of the market. Even if there is no further capital growth you can still sell for a profit. As Robert Kiyosaki says in Rich Dad Poor Dad “a wise investor will make his profit when he buys the property not hope to make it when he sells”

· Housing remains affordable despite the high price tags. The RICS forecast 2006 states: “Furthermore, house prices are sustainable at present levels as mortgage interest payments still account for 8.9% of households’ disposable income, compared with the long run average of 9.2%.”

· Rents and yields are increasing in many areas so profits from rents will increase steadily over time. Historically rent increases average out at 5% a year.

· Finally, for many people investing in a UK property is a less risky proposition than an overseas investment. It may not have the potential rewards of investing in India, China or Brazil but it is a solid investment and one they feel more comfortable making. There is no point giving yourself sleepless nights when you can make a very good return from investing in the UK.

© Frazer Fearnhead, the Armchair Property Investor

Frazer Fearnhead is the MD of The Armchair Property Investor, an organisation whose philosophy is to make property investment as affordable and accessible as possible so that more people will take control of their lives and use it as a means to achieve their financial goals. Frazer, is frequently quoted in the property press, writes for various investment publications and has appeared as a property expert on radio show panels.