Property investors have been dealt a few nasty shocks over the past few years. First, there was the additional stamp duty for those buying properties for rent. This was swiftly followed by an unstable economic situation and expanding inflation, some — though not all — of which can be traced to the Brexit vote of 2016.
Given the recent uncertainty, it is nearly impossible to try and predict what 2018 will hold for property investors. Could the waters be calming and sense returning? Or is there more tumult on the way – is it going to be a ‘perfect storm’? It’s impossible to say for sure, but what we do know is that the aftermath of the past few years mean that property investors are definitely going to face a few challenges over the next 12 months…
UK property demand is falling
This is the inevitable truth, revealed in numerous studies; demand for properties fell over 7% last year. This is a worrying sign, but perhaps not surprising given the economic misfortunes of the past few years. If people feel that the economy is uncertain, they’re less likely to want to move home, preferring to dig in and wait for calmer times. This means fewer properties will be listed for sale as a result, as owner occupants elect to stay in their current home for the time being.
Counteracting this perfect storm of fewer buyers and low stock is going to be key for property investors. One of the best ways to achieve this may be a change in strategy.
Higher standards required
When there are fewer buyers, it’s imperative that sellers do all they can to improve their property to a point where it becomes irresistible. At this point in time, it looks like buyers are going to be able to be choosy when it comes to finding their next property.
This means that renovation may be the buzzword for property developers in 2018. Rather than buying and selling houses with a minimum of work, investors are going to have to put the effort in to ensure their property is instantly attractive to potential buyers. Once upon a time, it was possible to sell a property that the new owners would need to spend time renovating to their standards. The condition of the modern property market has largely made this a thing of the past. Now, buyers can be picky, and they can wait to find a property that is ready to live in and requires minimal work.
Property developers will have to meet this need, potentially investing in upscale renovations and improvements that can wow prospective buyers as soon as they walk through the door.
The upside of large-scale renovations is that they should eventually pay off. The extra investment will mean more interested buyers and a higher asking price, allowing investors to potentially improve on their initial forecasts. Furthermore, even if investors have to wait longer than they anticipated to sell their property, they still have the option of capitalizing on a rental market that can still be described as buoyant. With an improved property, higher rents can be commanded, and investors may find that the yield is significant enough for them not to need to rush to find a buyer.
The economy (again)
Property investors will, once again, find themselves subject to the whims of the Bank of England in 2018. November 2017 saw the first rise in interest rates for 10 years. Admittedly, the increase wasn’t particularly astonishing — 0.25% to 0.5% — but it’s nevertheless enough to give potential buyers pause.
Recent years have seen record lows in terms of interest rates on mortgages, but November’s rate rise could be a sign that this will change. Property investors will need to note that the oh-so-cheap mortgage deals are becoming less common, which could have a further influence on the number of buyers available.
Is it possible that things could get even worse? The unfortunate answer is… yes. Interest rates tend to rise when inflation is beginning to grow out of control; it’s believed that consistent inflation of around 3% was responsible for the November rate rise. So the question becomes: is inflation going to continue to grow, with another interest rate rise on its heels?
Sadly, there’s no way of knowing the answer. “Probably” is the best that can be offered; Bank of England governor Mark Carney certainly believes that interest rates will have to be raised again, potentially more than once, in the next few years. This is worrying for property investors; the higher the rates climb, the more expensive mortgages become, and thus the fewer buyers there are in the market.
There is also the pressing issue of property investors who may have overextended their own finances, glorying in the heady days of cheap mortgages. If rates do rise again, then it’s not just a lack of buyers that property investors in this circumstance will need to worry about– it’s their own finances.
The housing market
More challenges for property investors to negotiate here, unfortunately. The housing market is not looking particularly healthy; mortgage approvals are at their lowest rate since 2013, and experts are predicting that house prices will begin to fall in 2018.
Many property investors will be able to weather this storm, but those that purchased properties at the height of the price bubble — and especially those who bought with low, short-term interest rates — could face a worrying combination of factors. They may find themselves suddenly paying more mortgage interest on a property that has since fallen in value; a possibility that all investors need to plan for immediately, given it is not unlikely that such a scenario could develop.
The London competition
Finally, some mixed news. On one hand, London properties may soon be in the reach of property investors who were previously priced out of the capital. London property prices are falling, and falling dramatically, even in the most high-end of areas. For property investors who always thought London out of their reach, that may be about to change.
The downside is that every other property investor will think the exact same thing, and the competition for the new lower London house prices could become fierce. There are likely to be bargains, but investors will have to be quick if they spot a great deal.
There’s no doubt that property investors face something of an uphill battle in 2018. However, there are glimmers of hope– there is the potential for higher profits thanks to freshly-renovated properties, and London may become a tempting opportunity that few investors can resist.