2010 - A Precarious Market Balance
David Boyd, Managing Director, PAD4U Letting Agents Manchester writes:
The property market staged a surprise recovery in 2009 amidst economists specualating further losses (as much as 20%) putting egg on their faces, the property market promptly about-turned and rose 5.9%. Economists scrambled to come up with explanations including the lack of supply; this particular snippet is one of my favourites it throws everything including the kitchen sink into an explanation, "The re-entry of cash rich buyers into the market coincided with an extremely low supply of property available for sale, as low interest rates limited the number of distressed sales and a significant number of home movers decided to offer their properties for rent rather than sale,". Phew!
After getting things wrong in 2009, the economists promptly and confidently predicted that 2010 will see a flat market "This year's recovery has to some extent been driven by transitory factors and there are reasons to believe that it will lose momentum over the coming year," said Martin Gahbauer, the Nationwide's chief economist.
They may be right this time -- but don't bank on it.
What is certain in 2010, as concerns the economy and property prices, is that there is very little to be certain about. The economy is precariously balanced. Quantitative Easing combined with low interest rates may not have had an immediate effect - but it was foolish of economists to underestimate the effect of these fiscal tools. Not only has the property market staged a surprise recovery but stock markets around the world have risen dramatically (the FTSE by 22% its biggest annual gain since 1997). Yet at the same time Gold, a safe haven for investors, has risen dramatically suggesting people are still not conviced that all is well.
The prices for Gold suggest it would be foolish to discount the massive budget deficient of the UK, the near certainty of higher taxes, higher unemployment, the possibility of inflation or deflation also still remain. The massive injection worldwide to cure the economic problems of the west has certainly had it's effect, but few would dicount the possibility that the cure is a temporary one perhaps. Any sudden movements by Governments to stop the stimulus or the Bank of England to increase interest rates prematurely could cause a double dip in many asset prices including property. Given the UK governments short term views based on re-election rather than a long term prudent fiscal policy this is possibility I do not discount. If we do have a soft landing this time, be vigilant and keep in mind the seeds for the next property bust may have already been sown.
What I have noticed is the volatility in property market does seem to have increased in last couple of decades. Perhaps this is due to the introduction of REITS, allowing property to be traded like shares in a instant. Perhaps it's the increased short term speculation of landlords looking to make money fast by capital appreciation after watching the numerous rags to riches property TV programmes. So what can the investor do? If you're feeling like it's impossible to make a sensible investment decision given the numberous factors and possibilities of what could happen in the UK economy. I would suggest paying less attention to macro economic factors and taking a bottom-up approach to your investment decisions. By this I mean concentrating on the what you know about the area and product (in this case Property) you are investing in. For stock and shares, concentrating on discounted cash flow, gearing and most importantly dividend yield rather than share price can help make a more stable investment decisions and following the legendary Warren Buffet - if you don't understand it don't invest in it approach. Likewise concentrating on a Property's rental yield, it's fundamentals such as what tenant's it will attract, what local schools are in the area, shops and affordability rather than capital gains can result in fair returns even if the market takes a dip.
Thankfully you don't need to know all the answers to a multitude of economic factors to become wealthy. But you do need to be realisitc, patient and do your homework. Property remains a utility like water for which every human being on the planet requires and for which there is limited supply. It is different than other asset classes and has proven a sensible investment strategy in the long term. But it isn't a get rich scheme and certainly doesn't reward all who speculate rather than invest.
If you are investing in property - please remember to talk with us. We can give you heads-up on expected rental returns, what areas are becoming easier to rent or more difficult to rent in our opinion, what mortgage options are available via our Mortgage Brokers, etc. Either way good luck in your investment decisions in 2010!