Property investors should consider census figures

The publication this week of the 2011 census succeeded not in shocking many of us, but confirming what we already knew.

Anyone blessed with eyesight will recognise the mountain of problems Britain is storing up for itself. In the space of 35 years, the country’s very fabric has undergone a revolutionary upheaval, creating a series of social trends with which few voters are universally happy.

The problem is, there’s nothing anyone can do to stop, reverse, or bring an end to these trends. Those who try are either marginalised or considered slightly deranged by a chattering class whose influence over media content has become a serious concern.

One feature markedly different from 1977 is, sadly, a more prevalent “I’m all right, Jack” outlook, reflecting, regrettably, the attitude of far too many political figures, their close media pals and celebrities to whom we continue to provide a steady supply of free publicity.

So from an investment perspective, does the census make for thoroughly depressing reading? Not entirely.

The 2011 census, published on Tuesday, revealed that the number of people renting from private landlords has almost doubled in the space of a decade.

This is partly attributable to the size of deposits first time buyers must raise before  buying their first home, partly due to a fall in home ownership (there are 750,000 fewer home owners than in 2001) and a steep rise in population. Accordingly, the proportion of people renting has increased from 9% to 15% over the last ten years.

What the census doesn’t show is that people are also renting for much longer. Young professionals, particularly those living in the south, rent until well into their thirties as they save to put a deposit on their first home.

Note this is not the same as saying that aspiring to buy a home is any less pronounced – far from it – but for the foreseeable future, lenders are unlikely to start offering 100% mortgages to youngsters fresh out of university without two ha’pennies to rub together.

Why is this good news for investors? Because property as an asset class remains attractive.

Buying an investment property IN THE RIGHT LOCATION (the only rule property investors need ever pay close attention to) will generally produce a gross yield of between 4.5% - 5.5%. If anyone is trying to sell a property with a higher return, ask yourself why. The probability is it’s either management-intensive or in the wrong location. Or both.

Furthermore, while capital growth in the investment property sector has been flat for several years, London being a notable exception, the longer-term cumulative effect of pent-up demand created by all of those savers / renters in their twenties and thirties means that ultimately, property prices will rise.

Up until the mid-1990s, it was possible to make a succession of short-term gains buying and selling property, but those days are gone and property is now a long-term investment. The UK’s boom-bust-boom-bust property cycle tends to last seven years and the sector always over-corrects, rising either too quickly or falling too rapidly when the market turns.

Some longer-term real estate players argue that we’ve reached the latest property nadir. There’s evidence to suggest that lenders are starting to compete for business and the 25% deposit requirement which prevented some investors from buying property has moved closer to 20% or even lower.

If London prices look a little lumpy, it’s worth noting that the proportion of private renters in towns such as Brighton and Bournemouth is actually higher (28%) than in London (24%). The cost of entry into either market is around half what investors would have to pay to buy a comparable property in London.

The days of ‘flipping’ property have long since disappeared. Yes, you’ll always meet someone in the pub who claims to be doing it on a regular basis, but frankly, it’s far too demanding of most people’s time to make it worthwhile.  For investors prepared to play a long game, therefore, the 2011 census suggests that buying property (remember: in the right location) remains a solid, longer-term investment.

posted on 13 December 2012 18:45 byPJS