House prices: Should I invest in property now?Posted on: 14 June 2010 by 50connect Promotions
House prices continue to rise in the UK but should you invest in property now? Financial expert Peter McGahan advises.
Do you think house prices will continue to rise and would you advise on investing into property now?
Readers of this column will no doubt remember how we forecasted the reasons for the current situation as far back as 2005 and why property would fall. Mid 2009 we agreed it would be a good time to buy property. It wasn't because we believed it to be cheap, it was because we believed the stimulus of lower interest rates and the impact of all governments fiscal policies would create some false confidence which could be capitalised upon.
And now would be a good time to capitalise on that i.e. consider selling.
There are many methods of valuing property and its worth. There is only one accurate one and it doesn’t necessarily relate to economics. Confidence brings with it irrational exuberance and the reverse is true of any negative sentiment.
Investors also have a desire to defend investment decisions. As most financial columns are written in the past or present tense you are none the wiser until after the event. Our columns always seek to look to the future by assessing risk and potential reward. Let's consider any potential for impact on house prices. You have supply, demand, and you have confidence.
Let's look at what will impact those.
Firstly, consider what yield you can get on a rented property and property in general. After expenses, which include stamp duty, legal and financial adviser fees, agency fees, costs of repair and the fact that occupancy is not always 100%, rental yields are well below 5%.
Whilst interest rates are low at the moment, this is emergency measures and with inflation soaring future interest rates can only go north. And so a yield of 2.5 to 5% (the norm on rented property) is hardly attractive over cash or an inflation proofed asset such as index linked gilts.
It is easy to use the argument 'ah but the property can increase in value to produce capital return' but that would be ill timed.
We await some of the biggest cuts in history which they expect us to be reeling from for twenty years. Public sector employees can expect vast wage cuts or freezes and there is an expectation of a considerable cull in employment. This is nothing new and was highlighted in this column over a year ago after our study of post global financial crisis. Unemployment is set to soar, wages will fall and that’s against a backdrop of higher prices through inflation.
All of this will squash demand as investors and potential homebuyers cannot afford the higher prices. The job uncertainty will certainly have a lasting impact on property demand.
Add to this the thought that capital gains tax will potentially be levied at 40% on non business assets such as second homes, demand will only fall further. Why would you hold all the risk of a property for so long and go through all the government-laden expenses of buying and selling it, to then see nearly half your gain disappear in one horrific cheque to the Inland Revenue.
During a rising market, many investors do not worry about the financial practicalities and so are blinded. It is only when markets become under pressure that the real risks can appear.
Moving into an uncertain market is not a time to be holding a 'fixed asset' such as property. I remember the last property downturn in 1989 where I couldn’t get a viewing on my property for six years, let alone get an offer.
The current smelly downturn was pretty much averted with a squirt of financial perfume which has come to an end. The real pain has yet to unwind. Remember that a fall in house prices is a fall in confidence as the UK use their house as a barometer for borrowing and spending.
The best time to buy property will probably arise in the next 24 months however when financial Armaggeddon is preached again.
By Peter McGahan
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Peter McGahan is an Independent Financial Adviser and Managing Director of Worldwide Financial Planning. Worldwide has won 16 Financial Times awards in the last four years. Peter has also been named the top media IFA of the year by Unbiased.co.uk in 2009.
Peter comments regularly in major journals such as the Mail on Sunday, Irish News and Sunday Times and is a weekly columnist for FT Adviser. He has also appeared on Working Lunch and the Today programme. In addition he is an expert on international tax matters for a range of international publications.
Worldwide Financial Planning Ltd are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made. The above represents the personal opinions of Peter McGahan. All information is based on understanding of current tax practices, which are subject to change. The value of shares and investments can go down as well as up.
If you have a financial query you would like Worldwide Financial Planning to respond to, call 0845 230 9876 or email email@example.com.
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