Mark Homer’s thoughts on Negativity in Property 2015

I have noticed some negativity about property investment in general in the last few days and thought I would put a few things in perspective. I have been doing this over 10 years and have noticed that every few years something significant happens to change the landscape. The changes I have witnessed have never been a reason to sell (although I use them as a reason to buy cheap properties from people who think they are).
We know property investment has worked in the UK for the last 1000 years (we have rough data from the days of William the Conqueror). We’ve seen property price changes since 1066 and now the introduction of a tax (albeit not properly thought through) which will be introduced slowly (next 5 years) and which can be avoided by using a ltd company. This tax change is highly unlikely to alter things significantly in the long term.
Much bigger events in recent times were:
The credit crunch/recession of 2008 – the amount of doom and gloom; people saying it was the end of property investment (even experienced people). Properties dropped 20-30% for 3-5 years (some places more) depending where you are located. In the vast majority of areas prices have recovered and are now higher than just before the crunch started. Tenant demand increased and rents rose through this time. Actual RESULT: landlords who held on and ignored the noise did best. Landlords who used it as a buying opportunity did amazingly well. Much of the stock we bought in this period is now worth (conservatively) 30% more.
Housing benefit was/is being reduced by the conservative government. This means that LHA tenants get less rent and Universal Credit gets introduced. Those landlords who adapted to take more private tenants and stop LHA have found that private rents have since increased anyway. Actual RESULT: Landlords who adapted to take private tenants and ignored the noise did best.
Mortgage Express/other lenders removed the daylight bridge in 08 – doomsters thought it was the end of being able to buy/control property with reduced funds/deposits. Those investors who adapted and learned new strategies and continued to buy using JVs, lease options and buy-refurb-remortgage did best. Actual RESULT: Landlords who kept on going and ignored the noise did best. Landlords who used it as a buying opportunity did amazingly well, much of the stock we bought in this period is now worth (conservatively) 30% more.
Sale and rent back deals (where a property was purchased and rented back to a homeowner who wanted to release cash/clear their mortgage) were effectively banned (regulated). Many thought it was the end. Those who evolved just changed their strategies to move people out of their homes and into another similar rental property or targeted people who didn’t want to rent back. Actual RESULT: Landlords who adapted to move these people into other properties in their portfolio and therefore were able to continue to buy their properties cheap, did best.
The last Labour government introduced rules which said that planning permission would be required for all new HMOs (even below 6 tenants). People shouted, moaned and many said it was the end. The new government realised how crazy this was and in 2010 this rule was reversed and planning was no longer required. Actual RESULT: Landlords who adapted their strategy and ignored the noise did best. Many learnt what properties planning could be acquired on and bought HMOs in these areas. In 2010, they reverted to their old strategy as the authorities came to their senses.
Another thing to remember is that the things I have mentioned above ACTUALLY happened.
90% (no exaggeration) of things that people worry about won’t and have not actually happened, some of which are below:-
“The EU will force the banning/regulation of buy to let mortgages” – the UK treasury got rid of this with an amendment to the interpretation of a professional investor.
“Buy to mortgages will all but be removed from the market: – The Times ran an article with a similar headline to this in 2008. The reality at the time was that buy to let mortgages on offer had reduced but
it was clear that there were still many options, those who persevered got borrowing and the market has grown significantly since the recession.
“Properties will drop 50% to 70% during the credit crunch” – yes they dropped but not by this margin and this didn’t affect those who held.
“Interest only mortgages are finished, capital repayment will be the only option following the credit crunch” – Whilst Owner Occupier mortgages in the main became capital repayment, the buy to let
mortgage market remained almost exclusively interest only.
“Capital growth will now stop/slow dramatically long term as the market has fundamentally changed”. Complete nonsense, although the market dropped significantly then recovered significantly for a period after the credit crunch prices have now stabilised and are growing again in much the same way that they did do in the previous 50 years. Market fundamentals have not changed much: Not enough dwellings being built and high immigration/ high rate of births means prices continue to rise.
“In 2009 Interest rates will increase to 10%” (I have heard this many times as a result of inflation picking up following extended 0.5% base rate). – Rates are still at 0.5% 6 years on and with inflation remaining low it looks like it will be at least 2016 before we have any increase, and then it is likely to be a gradually 1% annual rise to around 2.5% in 2018+.
“Ed Milliband is introducing rent control for privately rented houses”. – This went away with some of his other ridiculous policies when much of the public realised that he was likely to weaken the economy and in turn hurt their pocket. (My prediction is that Jeremy Corbyn’s current looney left policies wont gain traction either, as they are not workable/sustainable).
“EU tenants are moving back home and there will therefore a shortage of tenants.” – The reality is that tenant demand has grown with strength in the 10 years I have been doing this, as more babies are born and more migrants arrive.
So back to the reduction in mortgage interest relief: so what are the big investors I know (£50M+ portfolios) doing? For most, not a lot. Some (including ourselves) will transfer existing (using incorporation relief) and buy future properties in a Ltd company within which there will be no tax change. Stamp duty may be payable on the transfer so check Paragraph 18 of the finance act, there is a relief which you may be able to utilise here to avoid paying stamp. You certainly need an accountant to look over this for your circumstances specifically to make sure you/your portfolio is eligible.
This is not to say that you should ignore everything as “noise” and keep ploughing on as though nothing ever happens. Its always good to keep 1 eye on proposed changes (but be very mindful of who/what is suggesting the change is likely to come about as the quality of the source has a big bearing on the reliability of the information) but to take most of it with a pinch of salt and not make changes to your strategy (which can be costly) until you are sure they are actually happening/about to happen. Worrying about negative things that are statistically unlikely to happen (but may be billed by the media or others as likely to happen) can have a big detrimental effect on the quality of the work you do to grow your portfolio or increase the profitability of your business. Known in the study of economics as the opportunity cost of NOT doing something such as buying another good income producing property because of incorrect negative noise probably has the biggest long term drag/damage to the performance of your portfolio/business.
Seen in the fullness of time these changes (whilst annoying and ill thought through) will have the biggest effect on less experienced investors who choose to sell up and go somewhere else. In my experience the grass is almost certainly NOT greener elsewhere (and believe me I have tried lots of places around the world).”
Invest for Freedom, Choice and Profit
Mark Homer