Property and economic update

An orderly slowdown in house price inflation continues, further cooling the market and reducing the likelihood of severe realignment in house prices. This is reinforced by all the major market commentators, including the Bank of England who have kept the base rate on hold now for the last 4 months. The Hometrack report for November shows a 0.6% fall in prices across the country with the South East continuing to take the brunt of the falls. John Wriglesworth, Hometrack's housing economist comments “This month's house price fall confirms, beyond doubt, that the housing boom is well and truly over”. He goes on to say “…we expect house prices to stabilise next year and recover in the second half.”

The Nationwide paint a similar picture with an overall rise of just 1% across the country indicating that the market remains flat. Alex Bannister, Nationwide's group economist comments “As is highlighted by monthly price changes over the last four months, the trend in house price growth continues to slow… Housing market activity is now at its lowest for almost 5 years”.

So what does this mean for the property investor? Well good news, the likelihood of a severe fall in property values is diminishing, and the reduction in demand is resulting in some great property bargains. With some careful research, you will make some of the best purchases you will ever make, right now!

Is property still a solid investment?

House price increases have without doubt slowed considerably in recent months, giving rise to speculation in the media that a property crash is around the corner. The Governor of the Bank of England has come out and stated that the outlook for the housing market is “extremely uncertain”, with modest falls expected. So does this mean that property as an investment has had its day?

Absolutely not! Let's take a look at the facts.

Many economists use the house price to income ratio (HPI), as evidence of overvaluation, and a good indicator of house price realignment. We question this assumption because there are many other demographic and financial forces which are not taken into account in this ratio.

For instance, the HPI is based on single adult earnings when in fact most mortgages are based on two incomes. Accrued wealth is not taken into account yet the National lottery alone, has created 1,700 millionaires in the last 10 years. Also, the UK now attracts significant overseas buyers, further supporting increased house price levels.

Another major influence on affordability is interest rates. Today, base rates are just one third of their 1990 levels, so we begin to see that housing is currently more affordable than the HPI ratio would suggest. Throw into the equation the much changed demographics of the country and an all together different picture of house price stability starts to emerge.

Immigration into Britain currently stands at 200,000 people per year and is rising. Life expectancy is increasing. Divorce is also on the increase resulting in a higher number of single person households and single parent families. In fact, since 1996 the number of households in Britain has been growing by 155,000 each year, and this figure is set to increase in the coming years, yet the number of houses that have actually been completed averages just 125,000 per year. This is the lowest rate than at any time since the Second World War.

So it's quite simple, unless we build more housing there just won't be enough, and we all know that when supply falls below demand, market forces push prices up. So are we looking at a house price crash? Of course not.

So you can see that the method of comparing house prices to average earnings just does not paint a clear enough picture and is ultimately inaccurate. “Safe as houses”, though an old adage, is far from dead.

Great news! Rental values on the increase!

We have been telling people this for a while. With fewer first time buyers looking to buy, there is a huge increase in the number of people renting. This means that rental demand is starting to put pressure on supply, and as we all know, this forces rents upwards. It's the very same factor that has been pushing property prices up in recent years.  Supply and demand, it never fails.

According to the Royal Institute of Chartered Surveyors (RICS), rents are now rising at their fastest rate for three years. They comment, "The rent increases are due to rising tenant demand which is outpacing newly available rental properties in the market.  23% more surveyors report a rise than a fall in tenant demand over the past three months, a 9% increase since July."

You see as a property investor you really can't lose. When property values increase at a substantial rate, rents lag behind. When property values increase at a slower rate, the rental market catches up. It's win/win when you are a property investor.

“Christmas, is not a date. It is a state of mind.” - Mary Ellen Chase

“Give at Christmas: To your enemy, forgiveness. To an opponent, tolerance. To a friend, your heart. To a customer, service. To all, Chartity. To every Child, a good example. To yourself, respect.” - Oren Arnold

A new Psychology on investment – consider leverage capacity

So how do you establish the quality of an investment? Like most investors, do you look at the Growth and Yield combination? Well if you do you need to read this article, because you need to change your psychology on investments. You need to consider leverage capacity. What is this?

Take a look at the following example which should better describe it.

Which is the better asset A or B?

Asset B has 20% higher growth and 50% higher yield than asset A, so it must be asset B, right? Well, not necessarily, we are missing one vital factor - Leverage Capacity.

Let's look at the same example but this time considering Leverage Capacity.

After deducting interest cost:

You're correct, asset B returns a larger net gain. But we're still missing something! Investment is about return on investment – how much are you getting back on your original investment. Suddenly, we see that through leverage asset A has a better return by 13% - wow!

If we put all three together, Leverage, Growth and Yield a very interesting picture emerges.

You see, when you put Leverage Capacity in the picture, growth and yield almost become insignificant. By using a higher Leverage Capacity, you will not only increase the likelihood of a better return on your money, but it may also lower the risk on your investment as well.

Think about it, if most lenders are only willing to lend you up to 50% of an asset, it is because they consider the risk to be high. They are not interested in losing money, so they are basically saying that they believe the value of the asset could easily fall by up to 50%. But when you look at property, you can easily borrow 85% or sometimes even more. What are they saying? Well, they feel that property is such a safe investment they don't believe it would fall by any more than 15% at the very worse.

These lending figures are not simply plucked from the air but are carefully worked out by some of the most respected investment experts. Together with insurance companies they have researched and analysed huge amounts of data to establish accurate future trends, and they are rarely wrong. If they are only prepared to lend 75% of the properties value, they believe the risk to be greater.

Now don't get me wrong, a lower LTV does not necessarily mean that the investment is not as good as one with an 85% LTV. In fact, a higher risk can often result in greater returns. But risk is the key word here. You simply need to asses the risk to work out if it is right for you.

So next time you select an investment property, make sure your first question is:

How much can I borrow against this asset? I guarantee it will make you a better investor.

“Christmas is not a time nor a season, but a state of mind. To cherish peace and goodwill, to be plenteous in mercy, is to have the real spirit of Christmas.” - Calvin Coolidge

“What I don't like about office Christmas parties is looking for a job the next day.” - Phyllis Diller

Mortgage mind
The financial services section

A to Z of mortgage terms

If you are confused by the huge array of terms used in the mortgage market you are not alone. In an effort to help, we have created a quick A to Z of some of the terms you are most likely to hear (and a few silly ones where we couldn't find a term for the relevant letter).

APR - annual percentage rate. Usually shown in brackets after the headline rate for a mortgage deal, the APR is meant to incorporate any additional payments beyond the interest rate, thereby indicating the true cost of the deal. However, anomalies in the way lenders are allowed to calculate their APRs means they are not always an accurate reflection of what your loan would cost or a useful comparison with other loans.

Base rate - the rate of interest set by the Bank of England. Sometimes lenders call their own standard variable rate their base rate or basic rate.

Capped rate - a rate of interest with an upper limit but which becomes variable if the lender's standard variable rate falls below that level.

Discounted rate - a variable interest rate that is consistently a certain percentage below the lender's standard variable rate.

Equity - the proportion of the property you actually own, - ie the property value less the mortgage loan outstanding.

Fixed rate - a rate of interest that is set at a certain level for a prescribed period of time, regardless of what happens to the lender's standard variable rate.

Flexible mortgage - a mortgage offering a number of flexible features, possibly including penalty-free lump-sum and regular overpayments, underpayments, payment holidays and drawdowns, as well as daily calculation of interest.

Guarantor - someone who agrees to guarantee your loan, and is fully liable for its repayment should you default. Some parents do this for their children when they buy their first home.

Homeloan - another word for mortgage.

Interest-only mortgage - a mortgage where you pay interest on the entire loan to the lender for the whole mortgage period, while putting money into a separate investment vehicle, which should grow to cover the amount of the loan.

Joint application - a mortgage application involving more than one person.

Key facts illustration – details the key facts of your mortgage quote.

LTV - loan to value , the proportion of the value or price of the property, whichever is the lower, that a lender is willing to offer you as a loan.

Mortgage term - the length of time over which you have agreed to pay back your mortgage usually 25 years.

Non-status loan - a loan granted without the lender enquiring as to your income or credit history. Also known as special status. Similar to Self-Certification.

Offer – A mortgage offer made to you by the lender.

Property for Life – our mortgage experts can help with your entire mortgage and finance requirements.

Quotation - a document detailing all the costs involved in taking out a particular mortgage deal, such as interest rates, monthly payments, fees and so on.

Remortgaging - otherwise known as refinancing. Arranging a new mortgage on your home, often with a different lender, perhaps to release some of the capital or get a better rate of interest.

Self-certification - where you state your level of income to the lender which it will generally accept with the minimum of checks.

Tracker rate - a loan with an interest rate that mirrors an established base rate, such as the Bank of England base rate or LIBOR.

Unencumbered – A property with 100% equity (no mortgage).

Variable rate - an interest rate that fluctuates in line with the general cost of borrowing.

Will – It is important to have a will if you are a mortgage holder.

X-change (really spelt exchange, but I couldn't find another x) – When purchasing a property, this is the point at which the solicitors exchange the contracts and you become legally obliged to complete the purchase.

Yield – The return on your property investment.

Z - Zzzzzz

Need advice?

Maybe you're thinking of buying an investment property, or you need to release funds tied up 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.

The Maples, Maltings Lane , Witham
Barnsley Road , Sheffield
The Warehouse Apartments, Victoria Street , Preston
Duke Street Mansions (Phase 2), Duke Street , Leicester
Waterfield Mill, Balme Road , Cleckheaton
The GM Building, Fore Hamlet, Ipswich

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

Completions

Congratulations to those investors who have completed on their properties in Oxford Street , Leicester . This has proved to be a great investment. As well as getting a 15% discount off market value and putting in low deposits upon exchange, many of these investors have benefited from fantastic capital growth over the build time giving them a great return on investment. Rental demand for this type of property in Leicester is very strong and as such there should be little problem with getting good quality tenants. If you missed out on one of these apartments, take a look at Phase 2 of our Duke Street development.

Recent events

A couple of weeks ago we held a seminar at The Holiday Inn Hotel in Nottingham city centre. The feedback for this event was fantastic with everyone finding it very worthwhile. Following the presentation we all boarded a double decker bus and travelled to see the Marco Island site, as well as a completed show flat at The Habitat, Woolpack lane. Many people found this of great use, especially those who are purchasing units in Marco Island . I would like to thank all of those people who attended and made this event such a success.

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 http://www.propertyforlife.com/tellafriend.htm .

Back issues

Remember, you can read any of our back issues by following this link to our web site http://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.

A very merry Christmas and a prosperous new year from all at ‘Property for Life'