The Current UK Property Market - Help to buy and we do like to be beside the seaside?

Firstly a bit of supporting commentary for the updates from the last few months. No surprise to see help to buy extended as the government continues to try and prop up the market, fearing a housing crash which would come at a difficult time! The extension of the scheme however is only by two months, which will have limited impact of course.

The idea of divorcing the market from reality is an interesting one, but I have spoken before about how the incidence of unemployment may not harm the housing market as much as we might think - many of the job losses announced so far are not necessarily jobs that supported homeowners. That is of course expected to change, but the other side will also be the length of the unemployment. How much "scarring" will there be? That is the subject of much speculation.

We seem to have reached a point now where many are seeing an inevitable crash in October and November, and in my years trading markets I learned that when the consensus is that something will happen, it just doesn't happen! The stamp holiday bullet has now been fired until next April, at the earliest. There are not many more levers to pull with interest rates already at historic lows......

There was also an interesting post by Richard Little, with comments that made me reflect that many developers may well be looking a lot harder at rental exits on current developments. This is, of course, sensible at this time but as so often, it is what the market does all at once that has the impact. So, for example, it was relatively easy to see that the London bubble had run its course in late 2015/early 2016. There were articles around at the time saying quite clearly that there were an estimated 50,000 flats in development in zones 1 and 2 at the time, and demand estimated at between 15,000 and 18,000. This is a classic bubble scenario - many get on the gravy train too late, then there is oversupply and it exacerbates the problem when the bubble finally pops. I'm told there are currently over 15,000 flats in development in Leeds city centre and demand for less than half that number - I'm not aware of the figures in Birmingham and Manchester, but if I was developing flats there, I would be! A lot of the difference you will see with those who survive over time without going bankrupt is that they make themselves aware of this data.

So - it seems somewhat obvious to me that when things do start to go in the expected direction - downwards (rather than the Hometrack report from last week which reported +4.5% year on year in Nottingham, +4.1% in Manchester, etc.) - that there may well be a glut of rental stock appearing which will be new, decent standard, command a rental premium.......until everyone realises just how much of it there is. London in the past few months has seen a glut of supply simply because the SA providers have sought single let tenancies, blissfully unaware that many other SA providers are doing the same. Results, anecdotally, have been tenants trying to avail themselves of massive discounts because it became a renters market suddenly after years of chronic oversupply and prices shooting up on the back of that.

This is a danger to all BTL landlords. So - how might this be mitigated? One would be to be looking at "bread n butter" stock. Areas where there ISN'T much development - but it is solid. Well located suburbs, cheap stock - that seems relatively safe. If there are lots of developments going up around them though - normally this would be a great sign, but it might be next year's rental competition so just bear that in mind!

The other alternative that springs to mind is social housing contract style arrangements. Moving out of the PRS market with at least a percentage of stock/purchases in order to secure longer leases with HAs/RPs/charities and other organisations. I have been doing this for 6 years as has Sue Sims, and Sue is expanding her relationships and offers some great seminars (offline and online) about this stuff.

2020 for me has been a bit of a lesson in what I learned from when I worked in Wealth Management:

Diversification is absolutely key.

Markets are irrational.

Time in the market not timing the market.

Take opportunities that present themselves when they do.

Invest in fundamentals and ideally in asset classes that correlate very little with each other.

Commodity prices and traditional "hard" assets are shooting up. Is this because markets have recovered much of their losses from March/April and now the news of the "second wave" (not that the first wave was ever over, in England anyway) around the world has got everyone very concerned. But remember, as soon as it looks obvious, it probably won't happen.....

Never in any economic historical situation have I seen such activity from government on fiscal policy with so much willingness to do more. Never to my memory or research has there been a recession that we are so well prepared for (although, technically, we will already be out of the recessionary part - for the moment anyway). The textbooks may as well go out of the window - this will be all about learning by doing, and being agile. There are still several sensible takeaways:

1) Do not overleverage/overgear at this time

2) Invest on fundamentals

3) There are deals in every market. Those who are ploughing through all of the portals, auctions, and all the opportunities that come across the desk are finding things.

4) The world won't change completely, but 10% is a big change

5) Be open minded. There are lots of things that looked obvious already that simply haven't happened and may not happen - be prepared to update your positions

6) Saving is over. Forget saving. Sensible leverage is the only way forwards for the next couple of decades. The old "never a borrower but a lender be" has multiple layers to it, but at this time, if you aren't borrowing, you are at significant inflationary risk.

I'll finish with the stat of the week that jumped out to me - mortgage applications for seaside towns are up 15%. There will be a GIANT feeling of "life is too short" at the end of Covid (or at least, when it is another manageable illness), there already is one now, and people are taking action to "de-urbanize". How should you take advantage of this in your property business?

As always, comments, shares and likes are very welcomed indeed!

Adam

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