Property and economic update

After a year of remaining static, interest rates are starting to ease with the announcement of a 0.25% cut in the base rate from the Bank of England Monetary Policy Committee. Interest rates now stand at 4.5%, still at historically low levels as the graph clearly shows.

(source Bank of England)

So will this interest rate reduction help to stimulate some movement in the housing market? Well, we'll just have to see what happens over the coming months; what we do know for sure is what happened over the last month.

All the main market commentators have reported either marginal gains or falls in house price inflation, indicating that the market is continuing to stagnate. The Nationwide have reported an average increase of 0.2% in house prices whilst the Hometrack survey shows an overall fall of 0.2%. With even a small margin of error such tiny figures show the market to be completely static. Berkshire was the only Hometrack region to show an increase (0.1%) whilst 17 regions showed static house price growth and 39 regions showed price falls, the largest being Hereford and Worcester with a drop of just 0.9%. Hardly earth shattering figures.

John Wriglesworth, Hometrack's housing economist comments: "The market is showing no signs of recovery. However, the key factors that determine the health of the market remain positive; high employment, rising household incomes, and low interest rates. What seems to be missing is simply buyer confidence".

Landlords increase portfolio size

The latest quarterly review by the Association of Residential Letting Agents (ARLA) reveals that buy to let property investors have been increasing the size of their portfolios. The report also shows that most landlords have no intention of selling their investment properties should property prices fall.

The report shows that the average size of buy-to-let portfolios has risen from 4.9 to 5.7 properties since the previous quarter. This continues the steady increase over the past year, from an average of 4.1 properties in June 2004.

Underlining the stability of the rental market, an astonishing 97% of all respondents report that, although the majority of tenancies agreed are for an average initial period of just over nine months, most tenants stay on for an average total of seventeen months. The overwhelming majority of tenancies, 82%, are arranged as assured short hold tenancies, and only one in 13 tenancies are arranged outside the Housing Act, most often because the rental levels exceed £25,000 a year.

Residential landlords are split fairly evenly between those who look for both a rental income and capital appreciation (47%) and those investing solely to create a nest egg for their future, to be realised nearly 20 years down the line (44%). This near 50/50 split has changed only marginally since the last quarter, while only one in fifteen landlords have invested solely for the rental income.

The average buy to let investor expects to hold properties for 17 years.

"Start by doing what's necessary, then what's possible, and suddenly you are doing the impossible."
- St. Francis of Assisi 1181-1226, Preacher, Founder of the Franciscan Order

"Never measure the height of a mountain until you have reached the top. Then you will see how low it was."
- Dag Hammarskjold 1905-1961, Swedish Statesman, Secretary-General of the U.N.

Two bedroom units - the real bread and butter

Live-alone, love-starved film character Bridget Jones seems to be setting a go-it-alone trend. Statistics show that more and more people are living on their own.

This has huge implications for the property market as it clearly shows that the growth in demand for residential accommodation driven by singleton living is hugely outstripping the growth in demand for homes driven by population growth alone.

Evidence shows that once somebody in their late 30s or in their 40s goes solo, often through divorce, they are likely to remain on their own. With a current divorce rate of over 30% in the UK this is a very substantial number of people, and as the UK divorce statistics approach the US level of 50%, demand for housing will greatly increase.

Many commentators are suggesting that with such strong growth expected in lone households, that there will be an increased demand for one bedroom apartments and studios and these would make good investments. However, while one bedroom apartments make great investments, we would disagree that the majority of single householders will be satisfied with a one bedroom apartment or studio.

We believe that 2 bedroom properties or units with 1 bedroom and a study will be in greater demand. We have found that most single tenants still need the extra bedroom or study for their computer, or hobby or all that furniture that they have accumulated before they downsized or got divorced. Buying that bigger apartment also opens your options to leasing the property to a couple, and therefore makes the investment safer as your rental options are maximised.

Live in the solution (by Vic Johnson)

In her outstanding book, "Choose the Happiness Habit", Pam Golden writes: "Take the story of two brothers who are twins. One grows up to be and alcoholic bum. The other becomes an extremely successful businessman. When the alcoholic is asked why he became a drunk, he replies, "My father was a drunk." When the successful businessman is asked why he became successful, he says, "My father was a drunk." Same background. Same upbringing. Very different choices."

The brothers chose different thoughts about the identical experience. Those thoughts over the years shaped the circumstances they now find themselves in.

There was a time in my life when I chose to think about challenges and obstacles as just more of the "bad luck" I seemed to attract. Ever hear the expression "when it rains, it pours?" That was my constant mantra when others asked me how things were going. So what do you think I got more of? If you answered "RAIN," you're correct!

Bob Proctor says, "you're either living in the problem or you're living in the solution." Now, when I'm confronted with what I used to think was a negative situation, I use a different thought process. I force myself to replace those negative thoughts that creep in with positive thoughts about how I might solve the "problem." Sometimes I'll take a notepad and just start jotting down ideas that might be a solution. At the same time, my thoughts are focused on the possible lessons I might learn from the situation so that I might profit from the experience in the future.

If you've guessed that it doesn't "rain" as much in my life as it used to, you're correct again. In fact, most days it's a beautiful, cloudless and sunny day! Only occasionally now do I get any rain, and it's good rain, the kind that makes living things grow.

And that's worth thinking about.

"The victory of success is half won when one gains the habit of setting goals and achieving them. Even the most tedious chore will become endurable as you parade through each day convinced that every task, no matter how menial or boring, brings you closer to fulfilling your dreams."
- Og Mandino 1923-1996, Author and Speaker

"Often the difference between a successful person and a failure is not the one that has better abilities or ideas, but the courage that one has to bet on one's ideas, to take a calculated risk - and to act."
- Maxwell Maltz, Author of "Psycho-Cybernetics"

Take control of risk

Property investment is all about realising, assessing and managing your risk. It sounds daunting but don't worry, this is actually a whole lot easier than you might at first imagine, and it will certainly make your investments safer and more profitable.

In general, 95% of the risk is imaginary, it will rarely happen but most of us believe in our head that it will happen 95% of the time. This is why most people will never take action to achieve their goals, but instead live their whole life trying to prove they are right about the risks. I am sure we have all experienced this before, it is human nature to be wary, but to be successful we must overcome this.

The thing is, if you really want to prove that an investment is risky, you can because there is an element of risk in everything we do. Every time you get into a car you take a risk. But you realize the risk, assess it and manage it, the same thing with crossing the road, or using a power drill, or changing a light bulb, you get the idea. The thing is, there is no reason not to do any of these things just because there is an associated risk and the same thing applies with investment, but you must realize, assess and manage the risk in order to maximise your margin safety.

What I am going to talk about here is to identify the 5% of the real risk with absolute clarity, not just imagination, and find a sound strategy to handle that, so that we can have a clear head to do what we need to do in investment, because at the back of your mind you know that the risk has been taken care of by a good system.

We have established that using leverage allows you to expose as little of your own money into a property for higher cash on cash return. Since you put less money in to a property, you will end up having more money left to manage risk. Creating wealth through property is also about a sustained effort over time.

Certainly to the casual observer, the property investor buys properties to create wealth. But if you look further, it is time that is the real commodity they are buying. This is because it is the passage of time that makes them money.

So the next consideration is the sustainability of your property holding capacity and understanding how to manage risk is central to achieving your investment goals.

Now, managing risk is in many respects an individual thing, but it has two components.

Firstly, it is related to the type of person you are. You may be risk adverse and feel most comfortable if you know you have 3-5 years risk managed for the properties you hold. Or you may be more of a creative business type and only require 1-3 years risk managed.

Secondly, it is also a function of the equity that can be made available to you to set up the money required for the risk management you need over that time, and this changes every year depending on the performance of your properties, and you will review your plan regularly.

Defining your risk allows you to quantify how long your risk is managed. We say never buy your next investment property without having your risk managed first.

So how do you calculate when you can buy your next property in safety? As an example, you may allocate a rental shortfall, perhaps 2 weeks vacancy and some maintenance as costs to manage. You may have an expected period of uncertain work that might be factored in for a year. What ever you think the risks are for you, put a monetary amount to it and work out your yearly requirements. Multiply it out for the number of years you want to manage.

When you have access to the funds required to manage that risk (and for a deposit), it's time to go shopping for property!

As an observation across our client base, it is certainly the investor with experience who is always looking for ways to release further equity to keep themselves safe with their ongoing property investment activities. To the ordinary person, getting finance is risky, and the paradox is the fact that getting finance is far less risky than doing without it.

The property investor who understands this concept is the one who can accelerate the growth of their property portfolio. As a portfolio grows, so to do the opportunities available to you grow with safety.

Need mortgage advice?

Maybe you're thinking of buying an investment property, or you need to release funds tied up as equity in your house. Perhaps you just want to find the best mortgage rate for your own individual circumstances and cut your mortgage payments. Why not call our mortgage department today? Our resident mortgage advisers will give you the best possible advice to suit your requirements. Call them today on 01252 737575.

What's available?

We currently have the following investment opportunities.

• South at Disbury Point, Didsbury, Manchester
• OE, Paradise Street, Oxford
• The Wharf, Titford Road, Oldbury, Birmingham
• Marco Island, Huntingdon Street, Nottingham
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• Mill Hill Gardens, Budapest, Hungary
• Sun Palace, Budapest, Hungary

Please go to www.propertyforlife.com/discount_prop.php for full details and look out for more great opportunities coming soon!

Make some extra money?

The 'Property for Life' referral programme is a great way to make extra money. Take a look at the table below to see just how much. If you know of anyone who is interested in purchasing investment property why not refer them to us. It's simple, if they buy you make money, and the more they buy the more money you make. Take a look at our website for full details www.propertyforlife.com/tellafriend.htm

Back issues

Remember, you can read any of our back issues by following this link to our web site www.propertyforlife.com. If you missed one, or you want to read that really interesting article but can't remember where you put it, you will find it all here.