Is the Buy-to-Let Market About to Crash & Burn?
The question we have been asked more than any other during this last decade is ‘When will the property market crash’
It is human nature we typically look at the negatives in situations and think the worst. So when investing, we are constantly thinking about putting off the purchase to wait for the ‘dip’. However, typically the dip does not come and clients find themselves missing the boat.
What you have to think of when investing is what are you doing this for and what is your planned time frame. For example, if you have a 10-year plan, chances are you will have a dip within that period. So regardless of if the dip is at the start, middle or the end of your investment cycle, you are more than likely to still come out on top.
Now, let us look at the issues we are facing at the moment and how we think the property market will react.
So as always we have to go back to the fundamentals. Look at the political and economic landscape and see how this will affect the fundamentals, from there we can get a steer on what the market is looking to do.
First and foremost the fundamentals.
- Interest rates/Liquidity
Any changes in the above affect the property market. Take taxation, we have seen recently that the Stamp Duty holiday kick-started the market and created a fantastic 2021.
So what is happening in the wider world and how is this going to affect the property market.
We are not going to discuss what is likely to happen here but we can take a look at what has happened and how this has affected us in the UK.
The main thing we can see is what we import from Ukraine and Russia. The top 5 items we import from Ukraine are Iron and Steel, Cereals, Animal fats, Oilseeds, and Waste industries. Russia, we import metals, minerals and oils, Wood, Chemicals and Fertilizers.
So overall looking at that list we can see that our food is likely to increase as the supply of cereals and animal fats are restricted. Building costs are also likely to increase as the price of materials such as timber are on the rise along with the elephant in the room ‘energy’. We rely a great deal on gas from Eastern Europe so we know that the cost of living is going to increase.
This in turn kicks inflation on and we will see a rise in the interest rates. We will come on to this in a moment.
The Cost to Build Properties
Now, this has not made the news as big as inflation did. The reality is, most developers work on a 20% profit margin, after Covid this came down to 15%. Anything lower than that the build is not worth doing so what happens? The developer has a choice, they either stop the build or they put the prices up. So this is what we have seen. Prices have started to increase already on the developments we are selling, this, in turn, pushes up the prices in the local areas so we see an upward turn in overall prices across the UK. Feb 2022 has had the property market’s biggest percentage rise year on year. We can say things are still great for investors.
Now this has been prominent in the news over the last few months and has been the major reason why we have had more calls as of late. So the reality is the BoE needs to be seen to do something when in actual fact there is probably very little they can do to curb inflation. The reason inflation is higher than it has been is primarily due to energy prices globally which have had a knock-on effect on all supply chains. It has also hit us at the pump and in our, everyday lives at home.
However, the reason I feel that raising the bank rate is futile is the fact that energy is a necessity. It is driving habits and our use of petrol are hardly going to change due to the increase in price as we will simply pay it. Also, the rates are only what they were pre covid so the reality is, pre covid was a great time to buy so there is no reason not to now. We don’t think rates at this level will affect the property market.
If they start to hit 4% then that is a different story.
What is happening directly in the property market
Michael Gove’s quality of property scheme is going to mean that there are fewer properties on the market to rent. If this bill is passed every single apartment and house will have to meet certain standards prior to being rented out. This is clearly not the case for a number of properties, therefore, these will have to be removed from the market prior to being let. This will reduce the number of rentable properties, pushing up rents and making the market more lucrative for investors.
Demand/Supply – The demand is still well up over normal levels and supply is still down. Although it is up over the last year we are still down overall and this will keep pressure on the housing market and prices will increase on the back of this.
Potential Stamp Duty increase for overseas investors – There has been talk about a potential increase in Stamp Duty for overseas clients. If this comes into force we will likely see a big rush for overseas clients to beat the change again pushing up prices.
We know that Brexit has caused a number of low-skilled workers to return home across the EU. This was then accelerated by COVID as individuals wanted to return home to their families.
In turn, the jobs that the traditional UK workforce didn’t want due to low wages had to still be done so the only way was to increase wages in these sectors.
We also saw a shortage of lorry drivers which again meant that the wages had to be increased in this sector to attract employees. Now, where did these come from, well these came from bus drivers as the pay was suddenly much higher so now local councils need to recruit bus drivers and so the process goes on.
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