A few assumptions, before we get started. Are you very interested and excited about property either as an investment or as your major asset? Would you like to consider (more) property as part of your investment portfolio, considering income, growth and possibly long-term for a legacy?
Let us consider the current and future economic environment in the first instance, with special thanks to Roger Martin-Fagg, Behavioural Economist, whose views and opinions I share:
The UK windfall payout since January 2011 has averaged £400m per month (that has been paid out by Banks for mis-selling financial products). The average payout being £7k. Therefore, the total has been £20Bn so far. It is expected to be another £8Bln in the next two years.
The Mortgage interest rates are very low, on a loan to value ratio of 75%, five-year fixed are just below 3%, Lifetime tracker around 2.8%, two-year fixed below 2% and a two-year variable around 1.5% ~ Source: Bank of England (BoE)
Total UK residential property transactions estimated to be 1.4 million in 2015, up from around 1.1 million over the last few years ~ Source: Inland Revenue.
The average house prices in England and Wales has ranged between 0.5% and 8.1% over the last two years and is expected to average around 5% in the next few years (subject to 3 Key risks) ~ Source: Land Registry.
New building accounts for most of the recent growth in housing investment: a trend expected to continue. ~ Source: BoE.
Indicators, income gearing, household debt to income ratio and ratio of house prices to earnings suggest housing remains more affordable than in the run–up to the financial crisis. ~ Source: BoE.
Net migration has supported labour supply ~ Source: BoE.
The price of property in London and the South East is a direct consequence of supply and demand, buyers are willing and able to pay: average price in London £500k.
Consider that most financial journalists live within 40 miles of central London and have a bias to comment and generalise.
Away from London and the South East, housing is affordable: with average prices in the North East at £160k.
So, big differences in regions, if you strip out London, the average price drops to £197k, which is 4.2x the median income of a two child household ~ Source: ONS
Lets take a look at 25-34 year-olds in England: in 2003-2004 59% Owned property, 21% Rented privately, 20% other. In 2013-2014 36% owned, while 48% Rented privately, 16% other ~ Source: English housing survey
Interest rates: an increase in interest rates, probably 0.5% in February 2016 or later in the year, to see the BoE base rate at 1% by year end 2016. Expect no crash the housing market.
22.6 million UK households: 63% owner occupiers, only half have mortgages. 66% of all one bed properties are bought with cash.
38% of all London property purchases are bought with cash. Nationwide, 60% of properties over 1 million are bought for cash. However, Buy-to-let (BTL) tend to have interest only, floating rate mortgages ~ Source: BoE
The UK Economy is performing well driven by strong consumer demand and rising investment spending.
Where are we in the business cycle? Roger states that we are 2 years into a 7 year cycle, so, therefore, we have another 5 years to benefit.
However, there are 3 key risks to consider:
1.Namely the direction (shock increase/doubling?) of Oil Prices (from $40-$50), Middle Eastern politics are impossible to predict.
2.Chinese Exports, continuing over supply of commodities i.e. Steel, along with poor domestic demand, and what is the likely impact on unemployment on the UK/West.
3. The possible exit of UK from the EU, will this lead to a Sterling crisis? what about tariff implications?
The UK chancellor, in his spending review and autumn statement, has announced that he is introducing an additional 3% to existing rates of Stamp Duty Land Tax (SDLT) on purchases of additional residential properties, buy-to-lets and second homes, from 1st April 2016. He hopes to raise £1Bln, to pay for additional housing schemes. This follows the Summer budget proposals in the reduction to mortgage interest relief, both significant blows to the BTL market.
However, the professional Landlord will survive, whose structure and model are correctly set up. For example, there is a possibility for an exemption for corporates, regain stamp duty costs by offsetting it against their capital gains tax bill when selling.
Rental demand remains high. Please make sure you have a smart Tax strategy.