With inflation gripping the global housing market, interest rates have skyrocketed causing many to wonder if the property market would crash, but signs are indicating a buyers market. In Singapore, where home ownership is high (90%), 55% now plan to delay plans to buy a home whilst 24% are considering dropping their plans to buy a home at all. In America, there is a buyer-seller standoff because prices have become too unaffordable for the former. In Australia, where availability of rental vacancies are now at its lowest since before the pandemic, interest rates are being passed in full to home loan customers. Globally, higher living and borrowing costs are slowing demand and pushing down house prices.
As house prices adjust and the market becomes more favourable for buyers, a common impulse for investors is to hold back from investing because of fear. Understandably, the media’s constant coverage of high interest rates has further amplified fear. However, it is very possible to grow wealth in the current climate, just as in times of crisis. As we enter into the buyers market phase, here’s how and where to invest to grow wealth.
Proven Game Plan: How to Invest?
Astute investors know the best opportunities abound during these times, in anticipation of house prices going back up. But it is with the right strategies that investors are able to adapt to current market conditions, identify the best opportunities early and make educated decisions that maximise returns and minimise risks. Now, more than ever, investors need to understand investment fundamentals and have a proven property game plan to avoid making mistakes that can cost them a fortune.
The most basic yet fundamental and influential factor affecting capital and rental growth is demand. Demand for property in key locations will keep growing and undersupply will put pressure on prices as tenants compete for a place to rent.
Demand for Housing
It is a simple but profound law of economics that scarcity drives price growth. Housing demand is the most influential driver of capital and rental growth. Because of oversupply, capital and rental growth has been depressed in the Malaysian housing market. Unless their property is located in a high demand area and purchased at a very good price, landlords need to be innovative in their approach in order to get tenants. The UK, however, has a long history of housing undersupply as housing targets remain consistently unmet due to strict planning legislation. This undersupply has snowballed over the years as the population increases—half the UK’s population increase since 2011 has been from positive net migration. With lockdown restrictions now lifted, immigrants and foreign students are coming back to the UK again and flooding the market with fresh demand for housing.
Growth of Capital
Capital growth is very much influenced by demand. Typically, property values increase over time, but factors such as large scale recessions or mortgage rates (indirect effect), can affect the rate of capital growth or price of the property, although prices in strong housing markets will only experience slower growth or small fluctuations in price. It is important in this case to look at long term growth alongside annual/ monthly/ quarterly growth to have a better and more complete idea of capital growth trends.
0 (Zero) or breakeven cash flow
Investing in the right area can ensure that returns are higher than expenses so that you never find yourself in a negative cash flow situation. In high growth areas like Manchester, where housing demand exceeds supply and house prices are relatively more affordable (unlike London), rental rates were high enough to cover expenses through crisis times like Brexit and the pandemic, and continued to go up even during times of uncertainty.
Low Vacancy Rates
Investors looking for consistent rental income in addition to capital growth should pay attention to vacancy rates. A low/ tight vacancy rate (or high occupancy rate) signals high housing demand, which translates to higher rental price growth and lower void periods for landlords. Robust demand for rental housing from both locals and immigrants alike drive occupancy rates to 96% and above in cities like Manchester, Salford, London and Birmingham, and Melbourne and Sydney. Rental vacancies are tight in these cities, driving rental income for investors.
No Barriers to Entry
Barriers to entry refers to regulatory measures that make investing difficult or not profitable. For example, many foreigners were unable to invest in the booming New Zealand property market some years back because the government had a closed door policy towards foreign property investors. Singapore, which has seen strong property growth, has had multiple cooling measures, the latest of which include increased Buyers Stamp Duty and Additional Buyers Stamp Duty, and the tightening of the Total Debt Servicing Ratio, which means foreigners pay up to 30% upfront on taxes. Compare this to the UK, where stamp duties for foreign investors is about 6% for a property worth £300,000.
Where is the Best Place to Invest?
As of Feb 2023, houses in Stockholm sold for 20% less than their peak. Sydney prices have fallen almost 14% YOY, San Francisco prices are down by 15%, Auckland by almost 22% and Toronto by 16%. Germany registered its biggest six-month price falls for 2 decades while a 5%-7% decline is expected in France this year.
Thus, the UK’s house price falls of 4.2% since the peak in Aug 2022 look pretty mild in comparison!
Still, depending who you speak to, house prices are either going to “crash”, “correct” or have a “soft landing”. With the possibility of a recession ahead, we expect house prices to go through a reset—especially after the extraordinary house price growth (induced by super-low interest rates) of the past couple of years!
Bearing in mind how the housing market has frequently defied expectations, the strength of the UK’s housing market compared to all the other housing markets, is clearly underpinned by undersupply. Not enough houses have been built to accommodate a booming population, causing demand to constantly outstrip supply. No surprises then that RICS (Royal Institute of Chartered Surveyors UK) Feb 2023 survey forecasts rents continuing to rise due to this significant imbalance.
Of course, tax incentives and financing margins play a big role in ensuring better returns. Tax incentives are a great boost for your returns. In the UK, the SDLT nil-rate threshold was increased from £125,000 to £250,000 for all purchasers of residential property in England and Northern Ireland, offering huge savings upfront. Conversely, Australia imposes high stamp duties on foreign buyers, and these vary from state to state.
In Singapore financing margins are typically lowered to 40%-50% for the purchase of your second property and depending on tenure and age, whilst in the UK, lenders lend up to 70%. Whilst banks in Australia have passed on the interest rate increase to home loan customers, there is comfort in the knowledge that UK lenders are reducing mortgage rates since their peak in Oct 2022 as they compete for business, despite yet another interest rate hike by the Bank of England.
In conclusion, now is when you will find the best opportunities for investment. If there’s anything Brexit or the pandemic has taught us, it is that a recession or a crisis is the best time to get great bargains. Just be sure to have a Proven Property Game Plan.
Join our upcoming webinar to learn more about global property trends and how to invest in property through both good and challenging times by clicking on the link here: https://bit.ly/3SEliTU
By Vivienne Pal