S2E4: Is the property market crashing? And what to do about it
What you should remember about your own home
Renting V buying is a choice between freedom and security. Rob values freedom so rents his home (but also buys property as an investment).
His view is you should own assets to grow wealth but you don’t need to live in your assets.
He acknowledges that emotion matters a lot with your home - and most people value security over freedom.
Bad news sells so you’ll see a lot of doom-mongering in property media (check our title out eh). But no, seriously there is nuance here because Rob would argue that the property market has already already crashed because inflation has cut the real value of properties so drastically. Check out our episode with the Bank of England if you want to understand this better.
Owning your home has some financial advantages - there’s no capital gains tax to pay if you have one home and you've lived in it as your main home for all the time you've owned it. Plus it’s easier to get other mortgages, e.g. if you want to start investing in property through buy-to-lets.
One way to think about the difference is that rent is the most you’ll ever pay for a property (if you’re renting) whereas a mortgage is the minimum you’ll pay if you own a property.
He suggests living in a property for at least 5 years, probably 10, if you want it to make financial sense because of the one-off costs of moving like stamp duty.
Renting is crap in the UK!
With the sharp recent rise in interest rates, some people are questioning now whether you are actually more secure as a home-owner because a mortgage can sink a household financially.
You actually pay more in interest at the beginning of a mortgage and more of the loan off later in the mortgage.
Roughly 100,000 people a month are coming off fixed rates, and having to remortgage at higher rates.
We’re at a point now where, although interest rates may come down, they’re very unlikely to come down to where they were before of roughly 2% - and maybe they won’t ever because those were historically low interest rates that we’ve never seen before.
Rob’s guess (not a forecast) is that interest rates will drift downwards somewhat over the next year but we’ve moved from one world to another.
Where we are now is much more normal historically, at 4% - 6%. In fact the average interest rate in the UK from 1971 until 2023 was 7.11%.
One way to deal with having your mortgage payments shoot up is increasing the term (or length) of your mortgages to reduce the monthly outgoing (although you’ll pay more over the full term of the mortgage overall).
You need to use a calculator or work with a broker to figure out what’s best for you.
The positive side of this massive interest rate readjustment is that it’s probably not going to happen again - we’re unlikely to see rates double or even triple as we’ve seen in the last 18 months.
If you’re on a standard variable rate, and are waiting to lock in interest rates on a fixed, the question is what are you waiting for at this point? Interest rates are unlikely to come down radically.
When you have a big correction in interest rates like we have, logically, the cost of property should drift down.
His guess is we’ll see property prices drift down a bit for some period of time, but there won’t be a massive crash.
People tend to anchor to their price, and don’t want to sell their house for less than they could’ve got for it lost year - unless they have to.
Only 1/3 of the property market has a mortgage on it - crazy!
If you’re buying property, and it’s your own home, is it wise to try to predict the market? Otherwise, if you really like a property, and you can afford it, if you wait for the price to come down you risk someone else buying it and not getting the home you want.
Whilst we can’t predict the future, it’s a better time to buy now than 12 months ago because prices have softened (and interest rates have cut into the real value of property).
What you should remember about property investing
As an investor you might be less risk averse than home-owners (if you have a cash buffer) perhaps waiting it out to see if there is a drop in interest rates before locking in a rate - but it’s unlikely to go down a lot.
In a way, it’s nice to cut your teeth in a hard market. If you can make money or be in a solid position when times are tough you’ll be in a really good position if/when things improve.
When investing, you need a long term view - will the price be higher in 20 years? That’s very likely. But what about 2 years? Who knows…
Rob’s got a theory that people are either ‘shares people’ or ‘property people’.
Property has a unique benefit of leverage - you can borrow money to invest in property - which you can’t do with most other assets.
You do need a lot more capital (money) to get into property investing though and it’s very illiquid - you can’t just sell it quickly/easily. This is a negative in many ways but also a positive in that you can’t make rash, quick decisions like you can with selling shares for instance - it takes a long time to sell property.
Rob thinks you need at least £30k today (at the time of writing) to get started with property investing.
You need to be much more serious and careful now compared to 10 years ago if you want to make money from property investing. It takes time, effort and knowledge to do it well.
Also, you need to consider if you can build a portfolio of multiple properties over time, even if it’s not possible to buy multiple right away.
Whilst Rob thinks it’s still viable to own 1/2 investment properties, it’s less appealing than it used to be, e.g. do you buy property as an individual or a company?
If you’re just going to buy one investment property, and that’s it forever, he’d question whether all the research and knowledge-building is going to be worth it. For starters, you’ll get better at it over time, plus the work managing multiple properties means you get benefits of scale. Certain costs can be similar whether you’ve got one or five properties. It’s also about return on effort. What you learn from investing in one property will be a lot of what you’ll need to learn to do five properties.
You want to know what you’re aiming for long term (one or many properties) so you can decide if you want to buy property via a company. You should speak to an accountant about this choice.
He doesn’t manage any of his properties any more himself (he did for many years) - instead he’s hired a virtual PA.
Whilst he’s broadened his locations outside of London, he likes to concentrate his knowledge on a few areas.
Property is not get-rich-quick because you need to be ‘rich’ to start with. And it’s long term.
To research an area, Rob suggests messing around on sites like Rightmove, checking demographics of an area, using street view, online communities like reddit etc. But eventually, it’s sensible of course to go and check out the place and see what the vibe is like. He also suggests meeting local agents - letting agents are a good source of info. You can start online but normally a search ends up in person.
Use Hometrack to see how a city is growing.
You should Google what yields are like in areas, and once you’ve narrowed your search, get confident what the likely yield will be using a calculator.
Look for a property which has something unique which elevates it versus the competition - e.g. a massive garden.
He’s tried to get away from renting to students because they tend not to take the best care of places, plus they often leave after a year, and you have to find someone else.
If you rent to a couple, you’re more likely to have them stay for longer than two friends because either of those mates might go off and find a partner.
He likes city centres because you’re going to have lots of tenant demand compared to rural areas.
Every property brings incremental hassle.
General rule of thumb is local letting agents are better than the big chains.
Property investment is not meant to be exciting - he loves it when nothing happens for months on end.
