There is no doubt in my mind that, unfortunately, the UK is going to slip into recession. This means that businesses will close and people will lose their jobs and, as a result, the property market will see a fall in prices.
Personally, I don't think it will be a crash as big as the 2008/2009 property crash. Let’s be honest, no one really knows what will happen to property prices. But if I had to take a guess, I would say that I think it could be an average of 15% reduction in values. Some areas may be more and some areas may be less.
So what makes me say 15%? Well the Bank of England have said, they think this could be the drop in house prices. I think many property surveyors have taken this on board.
I am in the process of re-mortgaging a number of my properties, one of which is a large house in Halifax. I converted this into 7 apartments about 6 years ago.
It currently has a mortgage of about £512k. I thought the value may be around £900k, so plenty of equity. However, I was shocked when the surveyor valued it at just £750k. He commented that it was because of the potential effect of COVID-19. That is a 15%+ down valuation because the surveyor doesn't know what's happening to the market and so is being over cautious. The main problem with surveyors valuing property like this is that, actually, it is the surveyors who are helping the market to come down. It is a self-fulfilling prophecy.
It is worth mentioning that I believe before we see property prices fall, which I think will be towards the end of the year, I expect there will be a mini boom in the property market. This is due to all of the transactions going through which have been stalled over the two months of lockdown. But don’t be fooled by this. I think it will be very short lived.
What Does All This Mean in Terms of Property Strategies?
First of all, I think it would be unwise to use a property flipping strategy, which you should only really use in a rising market. It's going to be a great time to buy property, as long as you know what you're doing. Also as long as you are prepared to hold property for the long term until prices can recover.
Will property prices recover? Well, the fundamentals of the UK property market remain unchanged? We live on a small but popular island, with a limited supply of accommodation and an increasing population.
That means in the long term, property prices and rents should continue to rise. Remembering that the property market, like any market, is cyclical and sometimes prices goes up and sometimes prices comes down. It's all about picking the most appropriate strategy for what's happening at that time.
When people think property prices are coming down I often hear amateur investors say things like: 'I am going to wait until the property market hits the bottom and then I am going to buy'. This is a great idea in theory. However, the main challenge with this idea is that no one knows when the property market will bottom out.
If you can somehow work out when this will be, please let me know. We could both then make lots of money.
If you do wait until property prices really have hit the bottom of the market, everyone thinks that prices can only go in one direction, i.e. up, then it means that property sellers are far more positive that someone will buy their property for more money. This means it is actually harder to get the great discounts that you can negotiate when the market is coming down.
“It’s all about picking the most appropriate strategy for what’s happening at that time.”
Increased Demand for HMO Rooms
When times are hard, people have to rein in their expenses and try to save money. I believe many people who are living on their own in apartments may decide to save money on rent and bills. They will either: move home to live with their parents, if that is feasible, or move into shared accommodation such as a HMO (House of Multiple Occupation). More cost effective than living on their own.
This means that in tough times, the demand for HMO's actually increases. Some people worry about oversupply of HMOs, which is indeed the case in many areas. However, I believe that there is an oversupply of very average HMO rooms. If you have good quality rooms, which are better than the average available on the market, then you should have no problem quickly filling rooms. I believe HMOs will continue to be a great strategy for the long term.
“One of the main challenges with a fall in market prices is that it may become difficult to finance these purchases in the traditional manner.”
Discounted Property for Sale
There will be lots of opportunity to buy discounted property including residential property, commercial property and development opportunities. One of the main challenges with a fall in market prices is that it may become difficult to finance these purchases in the traditional manner.
Mortgage companies have already increased interest rates and some have lowered the maximum LTV (Loan to Value) that they are prepared to lend. This means that it is now harder for the average person to get finance to buy property. Therefore the demand might be less than the supply, causing property prices to fall further and the property market to slow.
In market conditions like this, property investing tools such as Purchase Options and Purchase Lease Options become far more viable. This is because sellers of property become more open to creative strategies, when the market slows and they realise that there are not many buyers who are able to purchase their property.
For this reason, the market conditions over the next 12 months will make it far easier for us as investors to use creative strategies, such as Purchase Options (POs) and Purchase Lease Options (PLOs). These are tools which can be used in conjunction with pretty much every other property investing strategy. They are a way of controlling an asset without buying it.
“This month we are opening up my PLO 2020 Home Study Coaching programme, to prepare our students for what I believe will be the buying opportunity of the decade.”
The main problem is that most people are either unaware of these powerful tools, or do not know how to use them correctly. For example, PLOs only really work in certain circumstances, specifically where; the seller wants to get rid of a property and they don't need the money now, and they have favourable mortgage conditions.
The biggest mistake I see many amateur investors make, when they learn about a powerful tool like PLOs, is that they try and use PLOs on every deal they find. Unsurprisingly the sellers are not willing to enter into these creative situations in most circumstances. Thus the amateur investor incorrectly concludes that PLOs do not work. It's just the case of the amateur investor using them in the wrong way.
This month we are opening up my PLO 2020 Home Study Coaching programme, to prepare our students for what I believe will be the buying opportunity of the decade. Click here to register your details to gain no cost access to some free training videos which I have created around using this powerful tool. There will also be some live online Master Classes, which are the perfect way to get your question answered about these powerful investing tools. Exciting times.
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