Index
Since this is my first analysis, it will encompass my experience since February 2007. At that time, everybody was doing property and we were getting 85% LTV at what seemed to be cheap credit mainly because lenders were giving it away at x% BELOW BoE base rate and others used LIBOR. The deposit was gifted by the developers of new build houses and apartments.
In August 2007, I secured an apartment with a mortgage of £117K @5.79% fixed for 2 years against a value of £135K. It rented for £510 against £563 mortgage and £140 costs - I was subsidising the rent to the tune of £194 pcm. At the same time, the Credit Crunch' was announced and although the base rate went down slowly, my outgoings remained the same as my rate was fixed. Although I raised the rent and eventually took over the management, I was still subsidising the rent by a large margin.
On 15th September 2008, Lehmans Brothers collapsed sparking the biggest financial crisis ever prompting the BoE to aggressively reduce the base rate so that by March 2009, it had reached the magic 0.5% where it had remained since. But I still couldn't take advantage of it because I was STILL in the fixed rate period. Furthermore, the value of my apartment had fallen to under £100K putting me in negative equity AND negative cashflow. Fortunately, I was in a highly paid job as a computer programmer which helped me to more than afford the difference between costs and rent.
In October 2009, my mortgage dropped to £304 + £80 pcm which puts the apartment in cashflow positive territory. Since then it has slowly increased to £314 as it's a LIBOR tracker and this is giving me advanced warning of where base rates are heading.
By now I had purchased another property with a mortgage of £54K and a £25K personal loan. The payments were £236 mortgage + £317 personal loan + £14 insurance = £567 against £560 pcm rent ie £7 casflow negative. But it had a valuation of £96K which meant I had plenty of equity. The mortgage is on a 3-year fixed rate of 5.29%. It now has a valuation of £98K and a rent of £575 ie it's £8 cashflow positive.
2009 saw a slight rise in property prices thus reducing yields. Borrowing criteria tightened raising entry costs for first-time buyers and movers. Those who couldn't sell their houses entered the rental market rather than sell their properties at fire sale prices. This created a shortage of stock which raised prices; and an increase of letting capacity which lowered rental yields. Towards the end of 2009, the tightening criteria reduced the number of buyers and the only buyers in town were experienced cash rich BTL landlords.
This trend continued into the first half of 2010 which continued this price increase which, in turn, encouraged sellers to come out in the 2nd half of 2010. I bought 2 more properties in the first half of 2010 - one in Feb. and one in July. In the second half of 2010, as more sellers entered the market, many things happened:
- Prices started to fall thus raising rental yields
- But, because credit criteria was very tight, many people opted to rent thus raising yields
- Reluctant landlords became sellers thus reducing rental stock which, in turn raised yields
At the start of 2010, many pundits predicted that 2010 would see house prices rising between the round figures of 5% and 10%. It's looking like 2010 will end with a little over 3%. This is the national average and results are highly regional. London being the region that consistently bucks the trend. With the draconian cuts in the Public Sector and the VAT rise to 20% from January, predictions for 2011 are up in the air. But there's a common consensus that prices would continue to fall throughout 2011 and into 2012. The Government, with the help of the EU, will tighten the financial rules making credit difficult to get, at least when compared to pre-recession levels.
So, the forecast for property prices in 2011 is that they would fall by as much as 5%. Yields are unpredictable because if prices continue to fall, sellers may become reluctant landlords thus reducing yields. This may be countermanded by people opting to rent as unemployment rises and wages get cut. There may be a rise in repossessions thus increasing the number of cheap properties in the market. These will be snapped by BTL landlords who will increase the rental stock thus reducing yields. So it seems that yields will be stagnant at 2010 levels. But, if the unemployment rises appreciably, yields will rise.
