Is it Doom and Gloom for the Property Market in 2018?
Taking a Short-Term View
There is no question Landlords and second homer owners continue to be taxed more. Landlords need to deal with the introduction of the Section 24 tax governing how Landlords can offset their mortgage interest and anyone buying a second home is going to be stung for an additional 3% stamp duty.
Many Landlords are now buying through Limited Companies to avoid the Section 24 Tax changes but will pay additional tax if they try and extract profits out of such a company, so it’s not always the right choice for everyone.
As we move into slower growth in the London with predictions of 1% to 2% in 2018, this would actually represent a real term decrease in property values when accounting for inflation.
With rents slowing and interest rates likely to go only one way, the media are reporting lots of doom and gloom in the market. But property should be a long-term investment and this when you can enjoy the real power of such an asset.
Looking at the Long-Term Benefit
One of the good things about letting out property is the rents tend to track inflation. So, your rental income is kind of indexed to the inflation rate.
Wages and rents tend to be linked too, see the above graph. I know over the last few years inflation has outstripped wage growth, but the long-term trend is there.
This means you rent you receive now is likely to have the same buying power in 20 years’ time. Great news if you are thinking about using property as a source for your pension income!
BUT NOT ONLY THIS INFLATION ERODES YOUR DEBT OVER TIME
You borrow £75,000 to buy a house worth £100,000.
For the 25-year mortgage term, inflation runs at 2% per year.
The value of the house grows in line with inflation, so in 25 years is worth £164,000.
Your debt, meanwhile, is still only £75,000.
By leveraging you get the benefit of growth on the entire property value even though you only put down 25% of the money in the first place. With the modest grow above your debt has shrunk to 45% from 75% over that period. And we all know the long terms growth of property is much higher than 2%!
SO IT NOT ALL BAD NEWS IF YOU TAKE A LONG-TERM VIEW
New taxes, Brexit, interest rates, slow wage growth. These are all temporary and go through cycles. If you keep your property for the long term, you benefit from inflation so don’t just focus on the short-term negative news. PS there are always property opportunities even in a tough environment.
The end! (Until next month.)
See you in March!