First the bad news: according to Knight Frank, prices are set to fall in the residential sector by 3% as a result of the current crisis. Even worse is the forecast of Bank of America Merril Lynch, that house prices would fall by 10% this year. Of course, we have said many times in the past, forecasting future prices is crystal ball gazing – it is like trying to pick the winner at a horseracing track – the punters don’t often get it right.
The general consensus in the market is that as a result of the UK lockdown, sales transactions will fall as people are forced to delay moving home. For many investors, the question then becomes ‘what will happen to prices?’.
To answer that, it is worth remembering that prices are a factor of supply and demand. More supply with lower demand results in prices falling; more demand with lower supply results in prices rising. So, if demand and supply are reduced in equal measures, as is likely, do prices rise, fall, or remain static?
Whilst some ‘bulls’ think the crisis will be over in the next few months and prices will start rising again, lots of ‘bears’ think it will last much longer. We are erring on the side of the ‘bears’, but let’s wait and see.
Importantly, prices may or may not fall in the months to come, but they won’t be any higher (remember forecasts!). When the crisis ends and the market returns to a degree of normality, there will be a flurry of activity from both buyers and sellers. The ‘early bird’ springs to mind, but it is far too early for capital growth bargain hunters to jump in.
Now the good news: interest rates are likely to remain low and the government seems intent on supporting various sectors, including housing, during and after the crisis.
As for the investment market, the residential rental sector will not collapse, particularly co-living/HMOs (Houses in Multiple Occupation). The key factors supporting it are the ongoing housing shortage and affordability, intractable problems to say the least.
Yes, there may be job losses in many industries, but there is a huge shortage of quality accommodation at the lower-income end of the market. There are lots of tenants who can afford £100 per week for a great room and that is not going to change, crisis or no crisis.
So, will prices fall in the co-living/HMO sector? We very much doubt it. Properties in this sector are typically sold on a yield basis. The capital gain comes from the rental increase rather than the rise in the value of owner-occupied homes. This means if you buy and sell at a 7.5% plus yield and rents have gone up 3%, your capital gain is 3%.
One of the keys to successful investment in this sector is to manage properties properly by maximising the rental income and minimising the costs so that they have an auditable track record of performance.
The resale potential is then all about the desire of future income-seeking buyers; are they going to be happy with the secure and attractive yield you enjoyed?
