After a long and hard fall in property prices and returns on buy to let investments, many landlords and prospective investors are desperate for any sign that property markets are about to turn. The signs have been mixed as I outlined in an earlier post – Is now the time to invest in Buy to Let – but a lot of people are getting excited about another signal.
According to various press reports such as this one or this one Adreas Panayiotou, a Buy-to-Let guru, has started buying again.
Now this bloke’s claim to fame is that he started warning about a crash in 2006. Now anyone can warn about a coming property crash, but he had a buy to let empire worth more than £1 billion and he was busy selling properties before the bottom fell out of the market. Now it turns out that he reckons the market hit the bottom in mid-2009 and he started buying again and has benefitted from a 10% in prices. I guess this is where we have to disagree though. He recently gave in interview and said that he was confident about the market over the longer term. Now that may be a bit of a fuzzy statement because over a long enough term the market will pretty much always come back in nominal terms (in other words before you adjust prices for inflation). Sometimes though the long term can be more than many of us want to wait. Property prices in Japan are still a fraction of where they were before the bubble burst.
Now I still think there are many reasons to worry about property prices. The first is the economy is still really shaky. And the impact of the government’s spending cuts have not even begun to filter through. But we are soon going to have very large numbers of civil servants hitting the streets looking for new jobs. At one time these would have all been viewed as perfect tenants because they worked for the government and were seen as a pretty safe bet. Now many will be struggling to pay the rent.
Another worry I have is interest rates. At this time the Bank of England is more worried about deflation than inflation, so it is keeping its rates low. That should not be comforting to any property investor or buy to let landlord. If deflation is on the cards that means that asset prices will be falling, in particular the price of assets such as houses and flats.
If deflation isn’t the biggest worry then at some point the Bank of England will have to start raising interest rates so buy to let mortgage rates will have to rise. Rental yields only look attractive now relative to low returns on cash in the bank and low interest rates that allow people to earn a net yield that is higher than the cost of borrowing. But if rates start rising then rental yields will not be looking attractive at all.
If you click through to the video interview with him, which I highly recommend, he outlines some useful rules for people looking to buy now. Among them are that people should:
- look at properties generating a yield of about 7%,
- not go above 65% on loan to value (LTV) to have a margin of safety assuming that interest rates will go up,
- only look at paying prices that are 30% below their peaks in 2007.
In essensce he argues that you should not expect captial return on any time frame of less than 10 years and should look at the cash a property can generate. This all seems sensible advice, so perhaps he and I are not as far apart in our views as I might have thought at first.
My advice is to still keep a close eye on the market or take a punt with cheeky offers on especially good prospects. But I won’t be putting money into the market right now. Then again, I haven’t built up a £1 billion buy to let empire, so what do I know.
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