The Fundamentals
The credit crunch has ushered in a new era of property investment. As little as 18 months ago, any sort of investor could take advantage of property deals such as ‘no-money in’ or buying to ‘flip’. These investment strategies took advantage of the fact that UK property had good short-term growth and credit was cheap.
However, in the current investment environment credit has dried up. Although we are on a decreasing interest rate trend, lenders are not so keen to pass on cheaper finance to borrowers – partly because they are keen to make up for the losses that many of them made as a result of the credit crunch.
Does this mean that it is a bad time to invest in the UK? On the contrary, it would seem that we are in a buyer’s market at the moment: it would appear that we are experiencing more supply than demand at the moment, putting the power into buyer’s hands. Buyers are in a position to negotiate the best terms for themselves, whereas 18 months ago, sellers were in a position where they could wait for a buyer to match or exceed their asking price.
Property investors could take advantage of our current environment by exploring the possibilities of purchasing off-plan. Off-plan has the advantage that you are buying at a discount from today’s prices, but, you are buying into tomorrow’s market (i.e. the market of when the property completes).
Looking back to the infamous house price crash of the early 1990s and the economic fundamentals: at the time interest rates were around 15%; inflation was around 10% and unemployment was approximately 4 million people. If we look at the situation today, interest rates are currently 5%, inflation is around 3% and unemployment is near record lows at approximately 1 million people.
It is interesting to see that house prices after the 1990s crash were higher than house prices before the crash. This shows us the value of looking at the long term. The important thing to note is that by taking a long term view, investors are mitigating themselves from short-term fluctuations in the market (such as the credit crunch). Combine this with the fact that it is a buyer’s market at the moment, it would seem that now is the ideal time for an investor to add to their property investment portfolio.