If we look back fifty years, property was not really considered by most as an investment vehicle. A house was usually purchased to provide security and stability as well as to boost social status. Since then the market has become cyclical with booms and busts throughout the years and creating various waves within the investment industry.
We take a look at how property investment has evolved through the last five decades and just as importantly, why?
The attitudes toward property in the 1960's were not really that of investment. At the time property was considered to be, (by the majority) a place to live. In the UK house building peaked in 1968 when 413,700 new dwellings were completed, compared to 1944 when only 8,100 were built. This was primarily due to the Labour manifesto in 1966, "Time for decision" which included the target of building 500,000 houses a year being set.
In the beginning of the 1970's only half of the population of the UK owned property. This soon began to change due to a stock market crash in January 1973, which subsequently drove down property and rental prices. The crash (which lasted until December 1974) affected all of the major stock markets in the developed world and led to a recession in the UK in 1974.
Causing a major property market crisis and resulting in rent freezes being lifted as part of the amendment to The Rent Act 1974. The aim of this was to allow property prices to adjust to a more reasonable level. Higher inflation throughout the decade led to lower predicted stock returns, as a result, investors looked to property investment instead. The increase in demand led to house price inflation rising sharply peaking in 1973 at over 36% per annum.
This was a pivotal decade for property investment, in the UK at least. Government decisions made a huge impact on the housing market. The Conservative Government launched the "Right to Buy" scheme. Enabling social housing tenants to buy the property they lived in at a reduced rate, the UK's fascination with owner occupation was born. During the 80's the stock market crashed so investors sought alternative investment vehicles, again property became the investment of choice and the market started to boom again in 1985.
In 1988 The Housing Act was formed as part of this legislation the Assured Tenancy Agreement was brought in to apply to rental properties. This gave landlords more rights with the eviction process, which in turn improved Buy to Let as an investment option.
Towards the end of the 80's, (87-89) interest rates in the UK began to fall, leading to a property price collapse in 1989.
The way in which people invested in properties in the UK changed significantly during the 90's due to an alteration in lending practices. Until the mid 90's, Buy to Let mortgages were offered at commercial rates, making it an expensive option at the time. The Association of Residential Letting Agents (ARLA - the industry body for the rental sector) proposed what is now referred to as the Buy to Let mortgage.
In 1995 ARLA brought together 6 lenders that would offer mortgages that would take into account rental income from the property. Buy to Let as an investment grew throughout 90's for several reasons. Property prices were 50% less than they were in the late 80's, thousands of home owners defaulted on their mortgages and had to find somewhere else to live. Unable to buy they had to rent. This increased the pool of potential tenants, and of course easier lending conditions followed.
The Housing Act of 1988 was revised in 1996 to include The Assured Short Hold Tenancy Agreement. This gave tenants the right to question excessively high rents and resulted in a higher number of people choosing to rent, increasing demand and subsequently the popularity of Buy to Let as an investment vehicle.
For the most part of the 90's the property market was down, negative equity affected over 1.7 million households. In 1990 the Government joined the European Exchange Rate Mechanism (ERM) and mortgage rates peaked at their highest ever level of 15.4% between March and November 1990.
Another factor to influence property investment was the dotcom boom in 1995. The rush of money into the stock markets globally was unprecedented with most companies being vastly overvalued. Throughout the boom there was a significant feeling of wealth, although much of it was only on paper. As we know now, this was not to last for long.
The property market only started to improve towards the end of the 90's, and as we can saw, started another property boom in 1997 that continued into the next century. The difference in attitude and affordability by the end of the century was significant with the rate of owner-occupation increasing from 10% in 1914 (When records started to be kept) to 68% in 1999.
Never before had house prices risen so fast, for so long and in so many countries than they did between the years 1998 and 2007.
The main factors attributable to the property boom this time round were the "theoretical wealth" created by the dotcom boom and the ease of credit. Both fuelled the residential and commercial property bubbles, making it easier for people with little or no deposit to purchase property, either by obtaining credit through mortgages or remortgages/equity release.
The year 2000 was a pinnacle year during this decade; in this year the dotcom bubble burst. Major investment had been placed in the dotcom sector, as it burst investors searched for alternative investments. Due to steadier returns than the stock market, as well as the tangibility offered, the shift back to property began. The rise in demand and stagnation of supply raised the market to an all time high.
This was not to last, the market fell in 2007 as recession hit globally. The property market fell as it did in previous years and no one is sure as to what will happen in the next few years to come.
To summarise, it seems that when an investment market crashes, investors search for better, more reliable investments in different sectors. This has been observed in the 80's when the stock market crashed and in 2000 when the dotcom bubble burst. On both occasions investors turned to property investment, this seems to have been because of the sense of stability that property presents and the herding instinct by investors. This behaviour has lead to booms and busts across almost all investment sectors and markets.
How will property investment look in the future?
There is no doubt that the cyclical effect is here to stay with respect to property investment, regardless of sector. The increase in general commercialisation has seen to that. The introducing of more regulation will in most cases bring about stability (Or at least that is what the regulators aim to do) and the creation of new investment vehicles such as property derivatives will allow people to hedge their investments against vast losses.
The key is to diversify your investment where possible to offset major losses. Cyclical markets are what allows you to make profit from an investment in the first place, if prices can't or don't change, how are you going to make a profit?
- Monday 05 July 2010