As investors, we tend to hold a glamorous image of the investing process.
And out of all the asset classes, property investment is probably the most sexy investment category.
Property investment courses and property agent brochures are fully of rich visuals of palm trees, piles of cash and sunny beach-side resorts. It’s an exciting place to be when the markets are booming and property prices are soaring.
But this golden era of property buying is probably behind us, for the time being anyway.
Pandemic and economic effects are causing house price growth to stall, and even reverse in some areas of the UK. London, in particular, has seen sluggish figures ever since Brexit emerged as a threat to the livelihoods of many professional workers and investors who base themselves in the city.
We’re therefore re-adjusting to a new era of modest house price growth. Even the estate agent groups who used to tout expected growth rates of 5% – 10% during the 2015 – 2018 period are backing away from those bullish figures, and publishing low single digits instead.
So how can you invest in property during such times? Let’s explore these two questions in this brief property investment explainer article.
How to invest in property during poor market conditions
Tip 1: Bring cash
The first thing that happens when customer demand for property wanes, is that the banks cut back on their home loan lending. They do this for two reasons:
- The credit risk on their existing mortgage book has just increased – lower incomes will mean that a higher proportion of their borrowers will be unable to make their monthly payments.
- Shaky house price forecasts mean that banks cannot rely on the value of the collateral which backs each mortgage. Therefore, the proportion of house prices which they are prepared to lend against will shrink. During golden years, it’s possible to find 5% and even some 0% mortgages – requiring only a minimal down payment by the property buyer. During harder time, anticipating house price falls, the banks will only accept deposits of 10% or higher, to protect their loan against any swings in value.
As a result of these two drivers, banks will be more difficult to obtain cash from, and this will make a cash buyer much more attractive to a property seller. This means that a wealthy investor can differentiate themselves from other buyers and potentially extract a better purchase price. This will provide them with an advantage in terms of investment returns later down the line.
Tip 2: Value the tangible
Property investment is often about looking into the future and understanding which areas of housing will see an increase in demand, (and therefore prices). Examples include areas about to receive access to public transport (such as sites for HS2 or Crossrail stations).
During an economically difficult period, large infrastructure projects (both public and private) can grind to a halt. This suddenly undermines the investment case for many properties.
Therefore this tip is to rely more heavily upon the current demand, features of the property and local amenities to base your buying decision. In other ways, base your investment case upon the current tangible picture rather than an optimistic view that the property might become a million-dollar home in 5 years time. If a recession is severe enough – the real incomes of households may fall to rise for 5 years.
Summary: A change in mindset is required
Overall, property investors need to adopt a different tack when looking for properties during murkier periods. In a rising market, virtually any property will see an appreciation in value. A rising tide lifts all boats, as they say.
A flat market demands much more of an investor. It will require the rental yield to be stable and compelling as it currently stands, without any assumption of rent price increases. It will require good local conditions which will continue to attract a healthy level of interest in nearby properties.