This article is taken from our autumn 2020 edition of Equinox. You can view the full version here.
House prices are enjoying a post lockdown bounce, rising by 1.6% in August alone and 5.2% over a year according to the Halifax*.
With headlines such as these and with returns on cash at dismal levels, many individuals are naturally tempted to jump on the buy-to-let bandwagon. With everything you hear about people enjoying yields of 5% or more, plus the rising prices, surely a 10% pa return is possible? Personally, I’m not convinced!
Firstly, let’s unpack that 5% yield, then we can move on to look at the outlook for prices.
A quick search on Rightmove for two-bed terraced houses in Macclesfield shows that I can buy a reasonable one for around £160,000 and that I can rent a similar one for £650pcm. So, with £7,800 a year in income then, voilà, that equates to a 4.90% yield on my £160,000 purchase price which, admittedly, appears attractive.
Now let’s have reality check. I would realistically expect a change of tenant every year – sure, you might get lucky and find a tenant who stays much longer but for planning purposes, I would think a year seems sensible. I would then assume a one-month gap between tenants and an agent’s fee of one month’s rent for finding a new one.
Add to that an additional agency fee of 10% so that I don’t get tenants calling me at all hours – oh, and I mustn’t forget to insure the property and account for a budget for repairs and maintenance (no, you can’t take it all out of the tenant’s deposit!) as well as pay for annual safety checks.
So, in reality, the numbers look more like they do in table one, below.
So, not quite the 5% headline rate hoped for and, with a yield pretty much in line with the Bank of England’s forecast for inflation, if I actually want to make any real money, I am 100% reliant on capital growth.
House price forecasts are incredibly varied at the moment with Barclays predicting 0.6% growth in 2020 (implying a third quarter fall) whilst at the other end of the scale you have Knight Frank predicting a 7.5% fall.
In reality, I don’t think anyone has a clue right now. What we do know, is that unemployment is rising fast, that house prices relative to incomes are at all-time highs and the cost of borrowing is unlikely to drop much further.
So, in my opinion, I think prices are unlikely to rise much further and significant falls are possible.
When you factor in the additional cost of purchase including legal fees, stamp duty (you still pay the extra 3%) and the void period between purchase and first let, then it could take a number of years just to break even.
If you are fortunate enough to make a capital gain, then you need to take into account the higher capital gains tax rate of up to 28% and also that the tax needs to be paid within 30 days of selling the property.
I remember the days of 10% net yields, low stamp duty, inflation busting capital growth and interest that could be offset against higher rate tax.
In that environment anyone could make money on property but, given the current conditions, I am not so sure I would “jump on the bandwagon” any time soon.
*Halifax Price Index August 2019 – August 2020
Disclaimer: The content contained in this blog represents represents the opinions of Equilibrium Investment Management LLP (EIM) and Equilibrium Financial Planning LLP (EFP). The commentary in no way constitutes a solicitation of investment advice. It should not be relied upon in making investment decisions and is intended solely for the entertainment of the viewer. Past performance is never a guide to future performance. Investments may (will) fall as well as rise and you may not get back your original investment.’
