We have gone through 3 property cycles in our property investment career starting in 1994. We have seen interest rate spikes as in 1994 and obviously the crash in 2008. Interest rates and inflation both seem at the moment to be starting to move upwards. Too many have become complacent and forget the pendulum swings both ways. For the past 10 years inflation was struggling to surpass 2 percent per year. Interest rates are at thousand year lows. Too many have gone the route of interest only in order to gain more short term profits. Then there are the tyre kickers who can not decide to purchase property.
Then there are the countless who wait on the sidelines with their money in the banks…losing purchasing power to inflation. Plus they have the risk of only being “hopefully” protected up to 85,000. We have spoken to so many so called investors who have completely unrealistic expectations or understanding. They think they can buy a Professional HMO in Salford Manchester today for 140k or do it themselves remotely. They think the banks will lend them without any experience! They end up doing nothing.
The current situation is that wages are rising and inflation is ticking up. Just go and fill up your car….or go to the grocery store. The Govt tries to control inflation with adjusting interest rates. The relationship between interest rates and asset prices is an inverse one. As interest rates rise, prices move in the opposite direction. As inflation goes up, so too does the cost of living. Us as landlords benefit as rents rise. A note that we have seen, is that rents in Salford Professional HMOs are shifting upwards. We saw one the other day for an en suite 135 per week. That is the highest we have ever seen. As a buy and hold property investor, this is exactly the benefit we are waiting for…
Clearly interest rates will rise more at some point. That is why it is prudent to lock in rates with a capital repayment. It’s been cheap to acquire loans and deploy capital. However have seen property investors wiped out when interest rates shifted. Either it is greed or stupidity, but so many property investors have taken interest only loans in order to maximise short term profits. The worlds central bankers have brought their balance sheets to a historical level that now has to unwind. This will inevitably remove liquidity from the market and drive interest rates higher. This is uncharted territory and has never been done at these levels. How many recall the high double digit interest rates of the 1980s or 1970s? We personally think due to the low interest rates this time could be much worse.
Another reality…..as much as property is safer than money in the bank there are issues. Especially the terraced houses in which we make Professional or Social HMOs not the wonderful city centre flats. However at some point when interest rates move up….property values probably will fall. The number of buyers probably will marginalise as liquidity tightens. Property investors who are on interest only will be facing their balloon payment coming due or squeezed profits as interest rise….they may be forced to “try” to sell…or give the bank the keys. More properties will become available.
As in London now, parabolic moves of real estate prices over the recent period may have begun to reverse trend. It is never wise to base decisions off of a single anecdotal piece of information, but it is wise to listen to experience and wisdom. We try to do recession resistant properties such as Professional HMOs and Social housing HMOs. No matter how bad the economy goes, people will downsize into a Professional HMO as it is the cheapest way to live with quality living….plus we do LHA terraced properties in which we purchase them below replacement value.
You can do nothing and leave your money in the bank or start your property journey. It is beyond hard to time the market…However prudence and the right properties can solve your cash flow needs.