After a couple of jolly busy weeks, what with the barrage of Easter egg hunts, followed by a series of Royal knees-ups, and of course hunting down Osama Bin Laden, there has been little space in the news for anything really relating to property at all.
The property market is still here of course – just with less tabloid drivel than usual. Of the few snippets that have made it out it would appear the sale of million pound-plus properties has risen significantly, demand for rental property appears to be on the rise and buy to let mortgage providers sound as though they are having the time of their life with applications going through the roof.
One set of questions that remain unanswered though are about interest rates. Will they rise? If so, when? Should you fix your mortgage now? Or wait?
Not being a financial analyst myself (and also noting that financial analysts can be wrong on occasion), it would be a little foolhardy for me to suggest quite what to do overall for the "average" home-owner or investor who already has a mortgage, the main reason being that everyone has their own individual circumstances to take into account.
Whilst there is no real question that UK property is widely regarded as being overpriced at present, the banks are still doing their best to get the mortgage market going. The idea being if the number of mortgages being approved rises, the housing market will gain confidence, house prices rise, ad infinitum.
This process is fine when there are temporary dips in the market. When the problem affects an entire country for a sustained period, this methodology can only last so long. Household income needs to catch up to pay for the rising cost of debt. In times of austerity, job cuts, and rising import costs is what effectively puts the brake on any real sustainable recovery to the housing market.
Even if you have enough cash to put down on a property to qualify for a mortgage at a sensible rate right now, it might all look very affordable today, but as interest rates begin to rise it can all become very unaffordable, very quickly.
The issue is that buying property with a mortgage in the current climate is effectively buying into very expensive debt on the short to medium term, with no real way out at all. If house prices rise further; the debt market will get more expensive to compensate. If house prices fall; you still have a rising cost in debt, and (just to add insult to injury) you end up with negative equity.
What to do?
Well for those that need to buy a house to live in, the rental option is still there, but even then rental prices are already on the way up and, coupled with the governments latest housing market stimulation ploy offering stamp duty deals to institutional investors, rental rates are only likely to rise further still, as costs inevitably rise at the lending levels that fund them.
If on the other hand you happen to be one of those with just about enough cash to front a deposit, but don't fancy the ever-increasing burden of debt that will come with it, there is another option. Invest the cash you have until the market corrects.
There are several forums and groups around boycotting the housing market, not just in the UK, but even as far afield as Australia – most of which have come about due to rising/stagnating house prices, rising cost of debt and reduction in income.
Leaving cash in the bank or under the bed is not really the answer though; inflation will simply eat away at your savings as it almost always does. The answer revolves around doing something with the money available that isn't going to be too heavily affected by inflation and provides a sensible return on investment (either through capital gain or income, or if possible - both)
Many in the investment world are still touting gold as the place to be – having covered this extensively in the past, I beg to differ. The market is just too volatile. Some are now saying "silver is the new gold" – this may be, but the volatility still remains.
The point I am making here is really down to eliminating as many of the costs and variables as possible. If you don't have a mortgage (or have a very small one – i.e. less than 50%) – interest rate rises are not going to cost you an arm and a leg. If you have a property that provides an income, you stand to benefit from rising rental rates too.
Doing this in the UK right now is nigh on impossible, the whole property economy is built on mortgages and the availability of "other peoples' money". The US however, offers a very different opportunity.
Property can be purchased at a fraction of the cost – without the need for a mortgage and removing the inevitable effects of rising mortgage costs. Property can also be rented out with the vast majority of the rental payments being subsidised by government schemes – ensuring that you will see physical income from your investment. On top of that, there is capital gain – granted that isn't going to happen overnight, but with a low priced property in the first place, your percentage gains will be more respectable and sustained than with an asset that is mortgaged to the hilt with interest rates that could rise at any moment, in a market that could fall in an instant.
Whenever answers are thin on the ground it's often said "the answer is there, it's just difficult to see the wood for the trees" – at the moment it's more a case of "too close to the wood to see the forest".
- Tuesday 03 May 2011