Thursday 8 December 2022

Inflation - Every Royal Tunbridge Wells Landlords’ Saviour




Some of you reading this will be old enough to remember the 1970s – the bell-bottom trousers, the huge collars, frayed jeans, disco glitter balls, maxi dresses, midi skirts but above everything else - HYPER-INFLATION.

With inflation currently standing at 11.1%, many of us envy the last few years when we have been lucky to experience sub 2% inflation.

But in the 1970s, the UK had proper and persistent double-digit inflation for seven of the ten years of that decade.

The average annual UK inflation rate for the 1970s was 12.3% per
year, with prices rising by 25% in 1975 alone.

The inflation was caused by several things, including oil prices quadrupling in the 1973 Oil Crisis (sounds familiar, doesn't it?), powerful unions, a high level of growth and investment in the 1950s and 60s, meaning it was easier for the British economy to experience inflationary pressures in the 1970s and the property market then was not immune to these inflationary pressures.

The average Tunbridge Wells house rose from £8,352 to £43,263
between the start of 1970 and the end of 1979.

That would be the equivalent of an average local house going from today’s price of £521,091 to £2,698,807 in 2032.


The existing climate of rising prices (inflation) is affecting everyone, from filling up the car with petrol to doing the weekly ‘big shop’. Looking specifically at the buy-to-let market, Tunbridge Wells landlords are suffering from rising costs and prices like everyone else, including a substantial increase in labour price inflation as skill shortages have pushed up the cost of using all the trades.


Other worries include whether tenants can pay their rent with the cost-of-living crisis. Also, there is a rise in interest rates which increases landlords' mortgage payments and professional fees, including accountants, and landlord insurance rates continue to climb.


So, is inflation all bad for Tunbridge Wells landlords?


Most economists say that inflation is bad for the economy. 


The absence of steady and stable prices makes consumers and businesses hold off making decisions to buy things, and when that happens, the economy stalls. Look at what happened in Germany in 1923, where you needed a carrier bag of cash to purchase a loaf of bread. Today, Zimbabwe has annual inflation of 269% a year, and Venezuela has 156% annual inflation, meaning their economies are on their uppers.


Thankfully, nobody is predicting British inflation will reach those levels.


Yet would it surprise you that inflation can be good news for landlords?


Property has grown above the rate of inflation over the last 50 years. It means that your hard-earned savings invested in property will increase in value over and above the inflation rate, which will safeguard your wealth during these periods of high inflation.


However, knowing where we are on the economic cycle makes it easy to spot when house prices are lower in the short term (in real terms), thus buying yourself long-term 'extra' profit.


The average Tunbridge Wells property today is worth £521,091. Roll the clock back to the autumn of 2007, and it was £351,287.


Quite a gain (and no profit) until you look at inflation.


It appears people who bought in 2007 have made money when they have lost it in 'real terms.


What do I mean by that? What exactly does ‘real terms’ mean?


Everyone knows that £100 today doesn't buy what £100 could have bought you ten years ago and much less than 20 years ago … that's the effect of inflation.


‘Real terms' means the price value after adjusting for inflation and expressed in constant Pound Sterling, reflecting buying power relative to another year. For example, the ‘actual’ price of a Mars bar in 2000 was 26p, yet its ‘real price’ (expressed in today's prices) is 74p. Why 74p? Because 74p is what a Mars Bar costs today. 


What price in the past has the same spending power today? So, looking at the £351,287 average price for a local house in autumn 2007 (as mentioned above), one would need £585,172 today to buy the same amount of ‘retail goods and services’ (e.g., cars, food, Mars Bars, holidays etc.) - that is what 'real terms' mean.


That means even without any house price falls (which many are predicting),


average house prices in Tunbridge Wells are £64,081 cheaper in ‘real terms’ today than in 2007.


Calculation: £585,172 (autumn 2007 Tunbridge Wells house price expressed in today's spending power terms – i.e., in 'real terms') less £521,091 (today's average actual house price in Tunbridge Wells) equals £64,081.



The other significant advantage of inflation for landlords is buy-to-let mortgages. Most landlords use a buy-to-let mortgage to buy their property investment. Let me give you some scenarios which explain why this is the case.


Firstly, let's assume there was no inflation (like in Japan in the last couple of decades). If a landlord took out an interest-only buy-to-let loan of £200,000 10 years ago, then in 10 years, that buy-to-let mortgage, which would need to be paid off, would still have a ‘real value’ of £200,000.


Secondly, let’s assume the same landlord took out an interest-only buy-to-let loan of £200,000 10 years ago (2012). In the last decade, there has been 31.4% inflation, so that buy-to-let mortgage would have a ‘real value’ of only £137,200.


Now inflation won’t be in double digits for the long term in the UK (higher interest rates and a recession will put pay to that), yet let's say the inflation rate for the next ten years was 4% per annum.


In this scenario, the ‘real value’ of the £200,000 buy-to-let mortgage falls to less than half its original real value of £91,278.


So, if one thinks about it, inflation could be just the thing that landlords need to shrink the ‘real value’ of their buy-to-let mortgage. As the saying goes, every cloud has a silver lining.


On the back of double-digit percentages, growth rises in rents, and everything stated in this article, inflation could be the silver lining!





Sunday 20 November 2022

Royal Tunbridge Wells Tenants Face Further Rent Hikes, as the Number of Available Rental Homes Drops by 56%


 

  • The number of properties available to rent in Tunbridge Wells has dropped from 492 to 218 since February 2020.
  • The average rent a tenant has had to pay in Tunbridge Wells has risen from £1,163 to £1,406 since February 2020.
  • Many Tunbridge Wells landlords have cashed in on the post-lockdown property boom of the last two years and sold their properties to owner-occupiers - not fellow landlords.
  • The supply of Tunbridge Wells rental property isn't near what is needed, which is of benefit to Tunbridge Wells landlords rather than Tunbridge Wells renters. 

 

The Tunbridge Wells rental property shortage is currently very evident. In this article, I will investigate why there is such a significant lack of homes available for rent across Tunbridge Wells and what it means for buy-to-let investors.

Anybody who enjoys surfing the property portals (Rightmove, Zoopla and On the Market) will have observed an emerging trend that the number of properties available to rent in Tunbridge Wells has dropped considerably in the last couple of years.

This reduction has been seen all around the UK as well. For example, on 1st November 2020, there were 372,931 properties to rent on portals. By the 1st November 2021, that had dropped to 275,650; by the 1st November 2022, that had fallen to 171,224.

That doesn't mean the number of privately rented homes in the country has dropped by over half. Fewer properties are coming onto the market to rent. I will explain why in this article.

 



 

 

For tenantsespecially over the last 12 months, it has become progressively more challenging to find a Tunbridge Wells rental homethus making the rent they must pay go up. This state of affairs in the property market isn’t showing an indication of getting any easier either, making for a hard time for Tunbridge Wells renters. 

So, what is the reason behind the Tunbridge Wells rental property shortage, and what does this mean for existing Tunbridge Wells landlords or those potential investors considering buying a Tunbridge Wells buy-to-let property soon?

Several different components are making the perfect storm in the UK property market.

Firstlythe number of households in the UK. 

The UK has not been building enough homes for the last 20 years. I appreciate that parts of Tunbridge Wells seem like one huge building site, yet as a country, we are woefully undersupplied with property to live in. This has meant house prices continue to rise due to demand 

The government have known about this issue for decades. The Barker Review of Housing Supply published in 2004stated that the UK had experienced a long-term upward trend of 2.4% in real house prices since the mid-1970s because of a lack of house building. The report stated that 240,000 houses needed to be built each year to keep up with demand. 

The average number of houses built since the mid-1970s has been around 165,000 per year, meaning the UK is short of 3,375,000 houses

(i.e., 45 years multiplied by 75,000 missing homes per year). 

Several years ago, the government set a target to build 300,000 new homes each year to address this issue

However, in 2019/20, the actual number of homes delivered stood at just 243,770. In 2020/21, the number of properties built dropped to only 216,000 new homes. In a nutshellthere are fewer available homes to buy, meaning fewer available homes to rent 

SecondlyTunbridge Wells tenants are staying in their rental homes longer.

Tunbridge Wells first-time buyer's average house deposit is £60,953

(the UK average deposit is £53,935).

The average rent of a Tunbridge Wells property in November 2022 is £1,406 per calendar month (up from £1,163 per calendar month in February 2020) – quite a rise!

These numbers translate into Tunbridge Wells renters not being able to pay the rent and be able to save for a deposit, or if they are saving, it is taking a lot longer to save for a deposit due to the cost-of-living crisis and higher rent costs.

Also, many Tunbridge Wells tenants have decided to stay in their existing rental homes because of the rent rises. Many landlords are less inclined to raise the rent on an existing property when they have a decent tenant who keeps the property in good condition and pays rent on time. Anecdotal evidence also suggests that rent arrears in those properties are dropping as tenants know if they don’t pay the rent, the chances are they will have trouble finding another property, and if they do, they will have to pay a lot for their next rental home.

For Tunbridge Wells landlords, this is all positive news -tenants are staying for longer in their Tunbridge Wells rental properties, arrears are lower, and void periods are less likelyWhen it comes to the market, there is less competition (because of the decrease in the availability of Tunbridge Wells rental properties) so this makes the investment an even better bet.

Thirdlylandlords are selling up on the back of recently increased house prices. 

 It would be difficult for Tunbridge Wells buy-to-let landlords to ignore the rising property prices in recent years

The average property value in Tunbridge Wells in the summer of 2022 was 13.2% higher than in the summer of 2021. 

For some Tunbridge Wells buy-to-let landlords, especially those who were classified as ‘accidental landlords’ (an accidental landlord is a landlord who never chose to become a landlord, it was just after the Credit Crunch of 2008/9, they found themselves unable to sell their property, so they temporarily let their own property out), they chose to ‘cash in’ on the higher house prices. This would have also contributed to the lack of available Tunbridge Wells homes for rent.

Yet everything isn’t all sweetness and light for Tunbridge Wells landlords.

Landlords have a few costs to consider before investing in buy-to-let, including everything from regular refurbishment costs, buildings insurance, letting agents’ fees, income tax, and, not forgetting, stamp duty

Talking of costs, one issue some Tunbridge Wells landlords are facing is their failure to plan financially for the recent mortgage interest rate risesSome Tunbridge Wells landlords may have become complacent to the ultra-low Bank of England base rates we have had since 2008 and, therefore, may need to sell their rental property, which, if bought by a first-time buyer, will remove another property from the Private Rented Sector.

Another hurdle to jump is the proposed new regulations requiring better energy efficiency for rental properties. It is proposed all new tenancies must have at least a minimum of a 'C’ rating for their EPC (Energy Performance Certificate)from 2025 (and 2028 for all existing tenancies).

Therefore, as a buy-to-let Tunbridge Wells landlord, it is wise to do your research to make sure the buy-to-let opportunity is correct for your rental portfolio, particularly when it comes to weathering any impending financial storms.  

Landlords need to consider the returns from their

Tunbridge Wells buy-to-let investments. 

Landlords can earn money from their buy-to-let investments in two ways. One is the property's capital growth, and the other is the rental return (often expressed as a yield). In 96% of buy-to-let investments, there is an inverse relationship between capital growth and yield (i.e., properties that tend to go up in value quicker will have lower yields 96% of the time – and vice versa).

Getting the best balance of yield and capital growth depends on your current and future needs from your Tunbridge Wells buy-to-let investment.

If you would like me to review your portfolio and ascertain if your existing portfolio will match your current and future needs for the investment - whether you are a client or not, feel free to drop me a line, and we can have a no-obligation chat and possibly organise a review. 

What does all this mean for the Tunbridge Wells rental market?

The continued shortage of Tunbridge Wells rental properties means it will be more difficult than ever to find a Tunbridge Wells property to rent, and so rents will continue to grow.

Unlike in ScotlandEngland and Wales do not have rent controls, with Westminster ruling out the possibility of introducing rent control here to deal with the cost-of-living crisis.

You would think rent controls would be a no-brainer, yet economists from around the world have proved for the last 75 years that rent controls might help tenants in the short term, yet ultimately it drives landlords to sell their investments in the long term, thus reducing the stock of available properties to rent out (not great for future tenants).

Therefore, it is highly likely that Tunbridge Wells rents

will continue to rise for tenants.

Landlords who persevere with their Tunbridge Wells buy-to-let properties or become a Tunbridge Wells buy-to-let landlord are set to benefit because they have an asset in very high demand. 

The housing shortage, not to mention the other issues discussed above that are affecting the supply of rental properties, is unlikely to be fixed anytime soon!

In conclusionthe Tunbridge Wells rental market is a constantly changing picture. What is known is that the supply of rental properties is far from what is needed, which can only be to the benefit of buy-to-let investors rather than of tenants renting. 

I see buy-to-let as a long-term investment. Everyone reading this knows that the real value in your buy-to-let investment is playing the long game, allowing your Tunbridge Wells buy-to-let investment to grow over time. Like the crypto or stock market, getting sucked in by get-rich-quick schemes that are selling 'apparent quick wins' in property investment is very easy.

I regularly highlight the best buy-to-let deals for Tunbridge Wells landlords with all the estate agents (not just my own). You don't need to be a client of mine either to receive that information. Drop me a line or call (without any cost or obligation) if you are interested in making your first Tunbridge Wells buy-to-let investment or considering adding to your existing Tunbridge Wells portfolio.