27 Feb 2019
Why British Buy-To-Let Could Damage Your Wealth In 2019
It only really makes sense to invest in a buy-to-let property when prices seem to be low compared to historical norms. There’s no doubt that property prices tend to fluctuate in a cycle and that cycle can seem random, but one thing we do tend to expect from cycles is a change in direction every so often. In other words what goes down usually climbs back up and vice versa.
Why UK Property Prices Look High
Generally, the best way of judging whether house prices are too high is looking at the affordability of homes compared to the average wage in Britain. For some time, the average house price for first-time buyers has been sitting close to five times the average wage in some of the cheapest regions of the UK, and way above that level in other areas.
That’s high, and historically the multiple has been much lower. For example, people who went into buy-to-let property in the mid-1990s, did so at a time when the average house price for first-time buyers was between two and three times the average wage. House prices seemed cheap back then and indeed, it did prove to be a cyclical bottom for the cost of a home in the UK at that time.
Just as property seemed cheap in the nineties, it seems expensive now. That matters because the cycle will likely change direction at some point and prices will fall compared to the average wage. Indeed, falling property prices and rising interest rates have been in the news during 2018, and there seems to be a lot of pressure building that could push property prices lower. We don’t know for sure if property prices will fall, or simply sit still for years while affordability catches up, or even whether property prices will rise further to form a bubble.
Too Much Risk Involved
Property investing is particularly risky right now because if a property falls in price by around 40% after you’ve bought it, you will need a gain of around 67% from rent, or rising prices later, just to get back to breakeven. And that’s without even considering all the costs and inconvenience you’ll face getting in and out of a property investment. Those kinds of gains could take decades to achieve in the property market and that’s why it’s not advisable to buy property now when prices look high.
In a climate of extreme volatility and uncertainty, it is crucial that you lock-in your savings and investments using vehicles that offer maximum security rather than the highest returns. Playing it safe is the name of the game and this is the strategy of even the most battle-hardened professional investors. The mantra of the retail investor in 2019 should be “stick with fixed income” no matter how tempting some opportunities may be. Never forget that the higher the returns, the bigger the risk and there are very rare exceptions to that rule.
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