Just how good are buy-to-let investments?

Warren Lewis
16th August 2018
Question 254

It's easy to doubt the property market at the moment. Annual growth is currently at its lowest levels in five years. London, arguably the main driving force of the UK property market, is seriously underperforming and the never ending threat of the unknown in the form of Brexit are all playing their part.

However, property investors might want to think twice as new research reveals average UK prices over any five-year period in the past half-century would have resulted in a buy to let profit 83% of the time.

Rarely in the past half-century have house prices dropped over a five-year period, with average house price appreciation over that time topping an impressive 58.6% over five years, new analysis by property investment platform British Pearl shows.

Property prices only fell in five periods, representing an 89.1% success rate. British Pearl then factored in Stamp Duty and conservative estimates for mortgage payments, legal fees and interest. This then identified a further three years in which investors who bought properties would have lost money over the following five — a success rate of 82.6%.

The only periods in which house prices fell were during some of the UK’s most challenging economic downturns. They included 1989, 1990, 1991 — while Britain was grappling with the recession of the early 90s — as well as 2007 and 2008, as Britain dealt with the fallout from the global financial crisis.

British Pearl’s simulated analysis includes conservative estimates for mortgage interest on a non-compounding basis and, therefore, identifies three other years in which entries into the property market would have resulted in a loss over five years. They were 1988, 1992 and 2006.

The best profit would have been enjoyed by the average landlord buying in 1969, resulting in a gain of £4,589 — a return of 148.6% as prices rose from £3,818 to £8,936.

The sharpest fall in house prices occurred between 2007 and 2012 when average UK values slumped by 7.9% on average.

That’s was the year of entry average investors would have suffered the worst loss, reaching £32,111 — 17.6% of the original purchase price of £182,243.

British Pearl’s findings come as a warning to savers, homeowners and investors who might be considering second-guessing the market by exiting with the intention of buying back in at lower prices. This has grown increasingly tempting in the past five years as values in many areas have staged remarkable rallies.

In London, for example, the average house price has climbed 51% since 2013, rising from £320,921 to £484,584. And the latest house price data from the Halifax revealed that the cost of the average property hit a new record high of £230,280 in July.

The analysis flies in the face of an increasingly sceptical outlook in some quarters.

James Newbery, Investment Manager at British Pearl, said: “This research shows investors who play their cards right and hold their nerve in the midst of economic or political upheaval are still likely to come out on top. History shows us that investors who are prepared to weather storms rather than run for cover are still able to make strong returns at times from investments that present a very limited risk of loss.

While our analysis shows housing has been a solid investment over time, we know that returns can be bolstered with careful property selection, identifying regional trends and areas of rental yield strength. The message, not just for investors but homeowners, too, is to play the long game. UK property has a track record of returns and, no matter how tempting it is to think prices are unsustainable, the level of demand for housing in Britain makes property one of the most attractive asset classes on an ongoing basis.

Those investors who ran for the hills after the dip between April 2007 and April 2013, only for growth to recover in the years that followed, will be kicking themselves for acting on impulse and abandoning property altogether.

The secret to successful property investing is ultimately the same now as it ever was. The market consistently rewards those who remain level-headed, diversify portfolios and do their research.”

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