Why the current property Market is a "Renter's" market
Having touched on this subject fleetingly in previous posts, i thought i would address the trends in the current market and why we are seeing increasing numbers of potential tenants and buy to let investors coming through our door on a daily basis.
As many of you are already aware, the property sales market is becoming more difficult, governments increasing deposit amounts and creating harder application processes. The number of mortgages approved in the UK fell to the lowest level for almost a year last month, suggesting that tighter lending rules may be taking some of the heat out of the property market. The Bank of England said 61,707 mortgages were approved in May, down from 62,806 in April and broadly in line with expectations in a poll of economists. It was the lowest monthly total since June 2013. Mortgage approval numbers are closely followed by economists as a timely indicator on housing market activity, which some surveys suggest has come off the boil in recent months.
The dip in May approvals follows the introduction of new lending rules in April under the Mortgage Market Review (MMR), which force banks and building societies to undertake tough affordability checks before they grant loans.
The Bank of England has been closely monitoring property prices for signs of a bubble but has so far held off from imposing any of its own forceful policies to rein in the market. Last week its financial policy committee introduced measures that will only bite if house prices rise more than 20% by early 2017.
For potential first time buyers, this tougher and stricter lending policy means that entering the property market may be an impossible achievement if current sanctions remain in place. Many buyers, be it first time buyers, or those looking to “upgrade” are finding it difficult and this is reflected in the current rental market.
June proved to be one of the busiest month’s I have experienced in terms of rental property, with new properties being snapped up in a matter of days, the evidence is indicative that now is the time to consider buy to let investments, more and more properties are required for an ever increasing demand by local residents and the large number of new residents moving into Shropshire from further afield.
I would like to take some time to do some comparisons between the sales and rentals markets here in Shropshire, focusing on my home town of Shrewsbury to begin with. Taking two similar properties in the same area of Shrewsbury, I would like to compare fluctuating sales prices and the advantage of letting over the uncertainty of an inconsistent sales environment.
Abbey Foregate, Shrewsbury, SY2
Abbey Foregate is a popular area of the town, especially for those young professionals working in the centre of Shrewsbury who require somewhere with a balance of quiet, residential and the convenience of a town centre location. We often receive enquiries here in the office for property to rent in this area, and I would always recommend that investors consider this area when thinking about where to buy for buy to let.
Having done research using a combination of property information portals, I have identified two similar properties in the Abbey Foregate area of Shrewsbury.
2 bedroom semi- detached house, a character property complete with private driveway and garage, currently on the market for £210,000. The property is well situated, close to the town centre with attractive period features, inside it is in need of some work in order to bring it up to a current, modern standard as the decor is dated and does not lend itself to mass appeal.
If we compare this to a similar, 2 bedroom semi-detached house in a neighbouring street, which although similar in size and situation, is a modern build, with plain, simple and sell-able decor, which last sold in 2013 for £160,000 we can clearly see the difference in price comparison. The other factor to take into consideration is that researching this same property i can see that in 2013 the vendors achieved a sale price of just £160,000 compared to £165,000 in 2006; this property has depreciated in value over 7 years.
Using this as a comparison, it indicates that the property first mentioned is priced slightly over the current average market price and the vendors will more than likely accept lower cash offers for a quick sale. The average price paid for property in Shrewsbury is around £198,726 which is substantially lower than the average asking price which sits at £279,699. Looking at this in more detail, i am able to determine that properties in this particular area (SY2) have an average current value of around £186,289 for a semi-detached, 3 bedroom houses with the average price actually paid for said properties being around £171,550
What i am attempting to highlight is that the current sales market is unpredictable, and suffers from constant YO YOing sales trends, with government schemes being introduced constantly to stem the increase in sales and steer the country away from another property ‘bubble’ which could cause further economic problems in the future, so by making the buying process harder, we are in fact being “saved” from further and more volatile consequences.
I would like to share with you some important statistics that will highlight the ever changing nature of the property sales market (focusing on the area highlighted before, SY2 areas of Shrewsbury). Please remember these are average statistics and not property specific:
These percentages indicate the percentage change in sales prices for the SY2 area of Shrewsbury over the past 5 years, it will show the amount in Pounds that it has increased by and then the percentage increase over the course of the past 5 years:
Current Average property value: £205,408
5 Years ago: £17,026 (9.04% increase)
4 Years ago: £9,442 (4.82% increase)
3 Years ago: £16,637 (8.81% increase)
2 Years ago: £14,158 (7.40% increase)
1 Year ago: £10,798 (5.55% increase)
6 Months ago: £5,135 (2.56% increase)
3 Months ago: £6,410 (3.22% increase)
It is clear to see the fluctuating nature of the sales market from these figures and these percentages are an indication that the sales market is levelling out once again due to government restrictions. If you are investing in property with a view to benefit from Capital gain it is important to research the market carefully, because as is clear to see the market is ever changing, and with a volatile market you could stand to lose out rather than gain from Capital Growth.
I have witnessed an increasing trend in the past couple of months, and that is the popularity of today’s rental market. With properties being Let in a matter of days and enquiries for new properties coming through mere minutes after the property goes live online, the rental market is busier than ever.
Simon Collyer, Director of Martin & Co Shrewsbury states: “We’re seeing an increase in the number of people who are opting to rent as their preferred choice of living. The private rented sector offers many advantages to tenants – whether they’re students, professionals or families looking for a long term home. The flexibility of renting a home means tenants are able to move home within weeks. It’s an alternative housing solution for a range of people and it’s increasingly the preferred choice of many. “
To demonstrate the advantages of buy to let investments i will focus on the same area of Shrewsbury, SY2, Abbey Foregate. This will enable me to demonstrate the sales market versus the rental market fairly, it is also a very popular rental area within Shrewsbury due to its location, accessibility to the town centre, and picturesque, aesthetically pleasing image.
Using figures provided by Zoopla, i can see that the average rental prices for properties in the SY2 area of Shrewsbury are currently around £542 per month (this figure takes into consideration a variety of properties, not just the semi-detached houses mentioned earlier). The average figure for rental prices throughout Shrewsbury as a whole is slightly larger at £590 per month, again taking into account a variety of properties and areas throughout the town. We can work out the yield percentage that a property will achieve through letting by using the sales price of a property, as an example i will use the property mentioned in the first segment, the 2 bedroom, semi-detached property in the SY2 area of Shrewsbury, on the market for £210,000.
Using the average rental amount for the SY2 area i can conclude that the average yield percentage will be 3.10% compared to the similar property in that area that previously sold for £160,000, the yield percentage (using the same rental amount) would be 4.07%. The ideal scenario for any buy to let investor would be to have a high yield percentage, for example, purchasing a property on the market for 80,000 and charging a rental amount of £550 per month would produce a yield percentage of 8.25%, this is a figure most Landlords would be happy with, maximising the total gain on their property. This can be easily achieved if the correct planning and forethought is put into an investment.
If you were to purchase a property with a view to Let it, and you were looking at a 2 bedroom, semi-detached property in a desirable area of town, you would be looking to pay anywhere in the region of £160,000 to £250,000. Let us take the lower end of that scale and say you purchased at £180,000, in order to produce a high yield, you would want to charge around £750 per month to reach a very respectable 5% yield. This is a good percentage to achieve in a rural town such as Shrewsbury, obviously investments in larger cities would more than likely achieve higher yields due to the number of young professionals working and living in the larger cities and the higher income brackets, this is to be expected.
However, it is important to remember that to reach the highest yield percentage possible and charge a monthly rental amount that will achieve this, the property has to be of a high standard, the competition to attract suitable tenants and gain long-term Lets is fierce, with Landlords wanting to minimise void periods as much as they can, the property investor has to be prepared to create a product that can be marketed and is appealing to a variety of tenants, be it young professionals, small families or older, retired couples. The tenants are out there and they are actively looking, BUT not only does a property have to be affordable, it has to lend itself aesthetically to appeal to a whole host of personalities and requirements. Remember, to a tenant it is not just an empty house, it is potentially their home, and it has to be somewhere they can feel safe, secure and proud of!
Letting your property is an extremely useful way of investing in your future and given the care and attention required can be a great way of ensuring your money is working for you. Property is in demand, buy-to-let landlords see the best yields in Wales, the North and the Midlands and on one and-two bedroom homes, a survey of more than 50,000 rental properties has revealed.
Most buy-to-let investors look for properties near where they live. But your town may not be the best investment. The advantage of a property close by is being able to keep an eye on it, but if you will be employing an agent anyway they should do that for you. Cast your net wider and look at towns with good commuting links that are popular with families or have a sizable university.(But don't forget that Shrewsbury will soon be playing host to it's very own University campus by the end of 2015).
It is also worth looking at properties that need improvement as a way of boosting the value of your investment. Tired properties or those in need of renovation can be negotiated hard on to get at a better price and then spruced up to add value. This is one way that it is still possible to see a solid and swift return on your capital invested. However, remember to ensure that the price is low enough to cover refurbishment and some profit and that you allow for the inevitable over-run on costs.
A good rule to follow is the property developers' rough calculation, whereby you want to the final value of a refurbished property to be at least the purchase price, plus cost of work, plus 20 per cent.
For more information on Letting your property, contact Martin & Co Shrewsbury on 01743340020 or call in and see us at 40, St Johns Hill, Shrewsbury (email: email@example.com)