Worried about a 20% drop in property prices?

by Readers Question

11:51 AM, 26th January 2014
About 7 years ago

Worried about a 20% drop in property prices?

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Worried about a 20% drop in property prices?

Hello!

I am hoping to get some ideas from a dilemma that I have. I have just had an offer accepted on a London 2 bed flat (share of freehold I am pleased to say) I am buying to let out and in the last 4 or 5 months have seen prices rise rather crazily, easily 35 to 40K.

Now I know that most of you guys here are only probably thinking that property will go up, but I am wondering if my thinking is flawed if I was going to only put down 20% as a deposit on the flat and borrow the rest on interest only? The reason I say this is because I have the full amount in cash to buy the place but should prices get cut in half, say a 50% drop then I can use the cash to buy up more?

I was also thinking that as prices have run up so fast to maybe just wait a while and let the election happen as we may then see some ugliness come out of politics and perhaps a removal of help to buy which may bring prices down and then buy the flat.

Of course I could be wrong and it may not rise or just go up even further. This is quite a dilemma to be in. I have enough cash at present to buy about 1 further flat out right but I am a property bear , so don’t plan to use this further cash until we have a upset in the market like in 2007. I guess my thinking is like buying a rose not on Valentines day but 4 weeks before and stick it in the freezer to get a better price.

Any strategies/ thoughts would be greatly appreciated.

MarcusFrozen Rose



Comments

Neil Patterson

12:01 PM, 26th January 2014
About 7 years ago

Hi Marcus,

I think the key thing to remember here is that No one knows what will happen to house prices in the medium to long term. It is all just educated guess work with outside influences that can change the economic landscape at any time.

All we know for sure is that there will be property cycles that is why the vast majority of Landlords invest for the long term and many have no intention of ever selling.

You can only make a decision that make sense now while trying to mitigate any potential future issues. This is why counter intuitively many people will tell you to borrow now, because you may not be able to in the future and it can be the safer option to have the flexibility of cash in your bank account than equity in a property you can not get at.

Richard Adams

12:19 PM, 26th January 2014
About 7 years ago

Like Neil says what prices will do in the near future is educated guesswork. Also what might happen in one locality might be different in another.

Lucky old you having cash to invest!! Why not look at opportunities through auctions etc where you might pick something up really cheap - a re possession perhaps? If you buy today anywhere well below market value you insure yourself against falling values in years to come.

Must it be London for you? It could be argued that since values in the capital have risen greatly recently like you have noticed it is there more likely than anywhere else that what you fear might occur. I don't think it will though.

Mike W

12:58 PM, 26th January 2014
About 7 years ago

Marcus,
The London market is primarily low rental yield because history shows that capital appreciation has been higher than elsewhere. You are right to question whether it can continue. The best advice I can give you is get out your spreadsheet and look forward 10-15 years. Put in factors such as average wages and start looking at wage- house price ratios. I'm sure you get the idea.
If London prices have been driven by 'overseas investor money' consider what the effect of the government plans will have wrt cgt on property. Will the money flow dry up? Then there is the Labour/Libdem disaster scenario of 'mansion taxes' - effect??
In my observation of the SW London market I have noticed a number of 2007 investors selling having just got back to their 2007 price. they were sweating for 6 years.

Whats your investment alternative? Shares? Overseas?

Try telling the guy in mid wales or some parts of the NE of England that property always goes up!

Jamie M

13:08 PM, 26th January 2014
About 7 years ago

You don't have a strategy - property will go up ad down throughout ownership over time and no one can predict anything. Until you have a strategy and reason for property purchase ownership and use, then you won't be able to decide anything. You also sound particularly risk adverse which is not great for property investment.

13:33 PM, 26th January 2014
About 7 years ago

Hi Marcus,

The only time any of us can buy property is NOW! I don't know of anyone who can go into the future to buy property ... or anyone who can go back in time to buy.

Success comes from sustained and intelligent action.

That means taking action in the now.

If you are in property for the long term, then what does it matter if prices drop by 20%?

Prices dropping only matter to those with a short term approach.

If you focus on cash flow, then price fluctuations when taking a long term view are irrelevant to you imho.

I do believe that the London market is over heated and my advice would be to invest in family homes in the South East as these will have better cash flow and may also outpace London for capital appreciation in the next five years.

Jeremy Smith

16:44 PM, 26th January 2014
About 7 years ago

Using Mark's mortgage calculator is really useful:

Just for the sake of easy numbers:

If you invest all 100k of your own and get 800pcm, you get 9,600pa , 9.6% annual return.
but
If you borrow 75k, and put in 25k of your own,
taking the interest rate at 5%, the 75k borrowed costs you 3750pa, leaving you with 4250pa,
now you have a return on your investment of only 25k, of 17% !!

other costs have been omitted for ease of example.

If you are not averse to risk, and you could find a lender at 99% LTV, theoretically, you could invest 1k, and get a return of 4650%.

- IF my calculations are correct !!

- My 100% LTV mortgages were fabulous back in the day !! -

Jeremy Smith

16:51 PM, 26th January 2014
About 7 years ago

If you needed £200k to get the same 800pcm, your return would only be 4.8%, you would then be better off buying it outright, since you would have to find a mortgage less than 4.8% to make the leverage work to your advantage.

Colin Childs

19:56 PM, 26th January 2014
About 7 years ago

Reply to the comment left by "Jeremy Smith" at "26/01/2014 - 16:44":

Back of the fag packet business plan. £4,250 is not the net profit. Comparing apples with pears is not the way to approach financial matters.

Jeremy Smith

21:00 PM, 26th January 2014
About 7 years ago

Reply to the comment left by "Colin Childs" at "26/01/2014 - 19:56":

That's right colin, it's a "back of the fag packet" calculation, one doesn't spend a day doing loads of calculations just to find out the blindingly obvious that can be done on a fag packet !

I did not say it was the net profit.
Try noticing the line: "other costs have been omitted for ease of example"

It is a simple example of how gearing can affect your % return.
He is asking if he should put up all the money, or take a mortgage on it, not asking for a detailed analysis of his business plan.

I fail to see what the apple is and what the pear is, I only see one property example here, either leveraged or not.

Colin Childs

22:16 PM, 26th January 2014
About 7 years ago

Reply to the comment left by "Jeremy Smith" at "26/01/2014 - 21:00":

Apples and pears is when you don't compare like for like.

"If you invest all 100k of your own and get 800pcm, you get 9,600pa , 9.6% annual return.
but
If you borrow 75k, and put in 25k of your own,
taking the interest rate at 5%, the 75k borrowed costs you 3750pa, leaving you with 4250pa,
now you have a return on your investment of only 25k, of 17% !!"

Sounds like a salesman from a boiler room.

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