All around the world, property bubbles are popping and prices are falling. Even in the bubble bastion of Australia, prices are crashing fast. We’ll explore why Australia is especially worth mentioning in tomorrow’s edition of Fortune & Freedom – don’t miss it.
But, for today, consider some thoughtful reader mail about property prices and investing…
One lasting social effect of 1970s inflation was the English, (possibly as opposed to UK), realisation that property ownership, even if it was just owning as opposed to renting one’s own home, was the only sure way for the average person to accumulate any sort of wealth, which was then made easier by the relaxing of the mortgage market.
Consumer price inflation meant that people could not accumulate savings from income and very few people owned shares, so if you didn’t own property you couldn’t ever hope to have “wealth”. Meanwhile, half a century later, a return to rent controls like the disastrous 1965 Rent Act as proposed by Sturgeon, Khan and the hard left – together with eventual inflation-driven rental increases – will lead to a “them and us” society of property-owners versus renters.
Keep up the good work.
Inflation today is, once more, creating groups of winners and losers. But, with property prices already too high going into the inflation, it’s much harder to be in the right group.
Bloomberg recently had the headline, “Rising Rents Aren’t Sparing Landlords From End of Easy Money Era.” Their point was that higher interest rates are providing a good alternative to rental yields. This is depressing property demand, which was created by investors looking to earn some returns during 0% interest rates and surging inflation. Quickly rising rental yields are not enough to offset the price drops in property: this is an unusual combination of trends.
Speaking of rental yields…
Today received my Fortune and Freedom readers mail, which as always, I read with interest.
Reading your reply on property the one thing I think you failed to take into consideration was the renter’s ability to pay inflated rents.
I have watched my local property rental prices rise, by hundreds of pounds each month in line with inflation – pricing many out of the rental market. However, at some point a tipping point will be reached. Just like it was in 2009. In 2009 we had a rental flat, and market forces due to the 2008 recession forced us to reduce the rent in order to get a tenant. As we have now entered the third quarter of a recession, what effect will this recession have on the rental housing market or the total housing market?
In the shires many of the rents are paid by us the taxpayers as part of the welfare payments system and I wonder at what point the government will stop being so generous with a bulging welfare bill and introduce a cap.The government has or will increase regulation on rental properties to ensure that they meet a standard forcing landlords to make improvements which makes buy to let less of an investment more a civic duty. Hence, I think many buy to let investors are looking to exit the market and with the budget changes to capital gains taxation it makes buy to let less attractive.
With a recession coming, rents may soon drop off.
But the concept of “Buy to Let less attractive” also points to less rental supply. And that forces rents up. Or rationing if the government won’t allow higher rents…
This mess is starting to resemble the energy debacle, isn’t it?
Given the expenses which my landlords have incurred over the years, I’m surprised that anyone makes money on net rental income. I once got more compensation than I asked for from a wayward landlord who failed to show up at the tenants tribunal…
But here’s the bigger issue with property. It’s largely a momentum-fed asset class.
Property investors tend to roll their gains into further property investments. And people believe that getting on the housing ladder is the key to future wealth, as the first reader mentioned. It’s more of an escalator really, you don’t need to climb, you just need to stand there and experience rising prices. I recall an article by a journalist about how the majority of his “income” came from his house, despite his working full time…
Because of the amount of leverage (through mortgage borrowing) in property that is available, the gains can be especially good.
But the momentum works on the way down too. The more losses mount, the more investors must sell to cover costs. The more prices fall, the more owners cannot sell and move elsewhere because this would realise losses.
In Japan, this is a serious issue because it causes a lack of labour mobility. People tend to buy a house for life, which almost always includes knocking down an old one, building a new one, and holding it until it is deemed unfit for use – in about 30 years.
If the property escalator really has gone into reverse, I don’t expect it to start rising again anytime soon.
With capital gains and rental yields looking questionable in UK property for years to come, perhaps it’s time to turn your attention elsewhere.
This small corner of the financial markets always has gains on offer for a very simple reason. Whether you profit is dependent on very specific and individual situations. It’s a great way to diversify out of inflationary, regulatory and financial risks. Check out if it’s for you here.
Editor, Fortune & Freedom