To buy or not to buy?

To buy or not to buy?
Is now the time to invest in property? With the increase in stamp duty and tax benefits 
being cut by the government, should we be looking to get a better return elsewhere?

According to one national newspaper over 500,000 landlords have told them they are planning to sell up because of the changes in the tax system. Conversely the same publication, who surveyed 1000 landlords, reported that 46% of them still said they were planning to buy another property in the next 12 months. So what should we all be doing? The average price of a house in Cornwall is now £190,911 (Land Registry Price Index 30th March 2016) and in Truro £248,269.

Cornwall prices are therefore almost exactly the same as the national average but Truro continues to grow at a faster rate than the rest of the county with a house price roughly 30% higher than the average. With more new developments being built on every scrap of land and the promise of further house price rises because of the new Waitrose (it is rumored that properties within "easy reach" of a Waitrose cost 12% more than other homes in the same area!) are we going to continue to see house prices rise?

The recent introduction of an extra 3% stamp duty on second homes and buy to let properties is certainly being felt in the sales market as transactions have taken a sizeable hit and some landlords are seeing their 'bottom line' being dramatically affected because of the changes to the tax system.

At present landlords can claim for interest on buy-to-let mortgage payments when they complete their tax return, allowing them to offset mortgage interest against rental income. Changes are being made to this system gradually from April 6 2017, with full implementation by 2020. In effect, landlords will be taxed on their turnover rather than profit.

So what does the future hold? Should we all be looking to sell our investment properties and put the money in the bank? The simple answer is that unless interest rates rise above 4% (the current rate is 0.5%) I can't believe that an investor will get a better rate of return than a rental property.

Should interest rates rise dramatically the average landlords mortgage will rise steeply, perhaps pushing them into a loss rather than a profit, however, remember property is also not just about the rate of return of the capital invested, there is also the gain in capital that comes along with the value of the property.

Imagine if you were lucky enough to buy a property in Truro in 1995 when the average house price was just £57,846. Today you would be looking at a more than 300% gain in value! I'm not confident that we will see the same rate of house price increase in the next 20 years but even if we continue with the current trend of 3% per year the average house price will reach £420,000.

Investing in property still seems a sensible option to me, but any investor has to realise that they need to plan for a longer term now and understand that even if interest rates rise and it costs and extra 3% to buy a property now, rents are continue to rise by 3.5% per year (Homelet rental index for the South West), demand from tenants is strong and with the help of a good agent, a rental investment will give a great return.