There’s absolutely no doubt that right now we’re at the start, or in the middle, of a booming property market.
Inflation adjusted house prices are approaching an all time high and some areas of the country have seen as much as a 15-20% increase in property prices over the last year.
With everything getting more expensive is now a good time to buy or invest in property?
It’s a question I’ve been struggling to answer over the last couple of months but I think ultimately the answer is yes… as long as you fully understand what you’re getting yourself into.
To have that understanding you need to know what happened during the previous crash.
What Happens To Prices When the Property Market Crashes?
When the property market crashes property prices go down (like duh obviously).
But how much do they go down?
The answer to that is very location specific and best illustrated with a couple of examples thanks to Right Move sold prices data.
Gateshead Property Prices – 2 Bed Flat
Aug 2007 – £95,000
Oct 2009 – £67,000
Dec 2020 – £77,500
- After the previous market crash (circa 2007) property prices for a 2 bed flat in Gateshead fell by 29.47%. They still haven’t recovered to pre-crash levels.
London (Enfield) Property Prices – 2 bed flat
Mar 2007 – £172,000
Oct 2007 – £148,500
Mar 2020 – £250,000
- After the previous crash property prices in Enfield London dipped by 13.66% but since have risen 45.3% from their previous all time high.
As you can see what happens to the price of a property after the market crashes vastly depends on where that property is located.
What Happens To Rents When The Market Crashes?
Aside from being able to buy investment properties cheaper when the market crashes the only other good thing is that rental prices remain the same and in fact, as illustrated below, continue to rise over time.
If you’re employing some kind of buy, rent and hold strategy then at least you have the security of knowing that when the market dips your cash flow will remain constant.
What Happens To BTL Mortgages When The Market Crashes?
When the property market crashes many home owners, and full time property investors are no different, find themselves in negative equity.
Negative equity explained: a property falls into negative equity when it is bought for a sum of money than is higher than it’s current value.
Lets say you buy an investment property for £100,000 with a 75% LTV mortgage – you have £25,000 worth of equity and £75,000 worth of debt.
The market crashes 20%.
Your property is now worth £80,000. You still have 25% equity (now £20,000) but you also still owe the bank on the original loan amount of £100,000 meaning you’re £15,000 short in the required equity for a 25/75 LTV on the £100,000 debt.
The bank comes knocking requiring a £15,000 payment as you’re now in breach of the terms of your loan agreement.
You’re forced to pay the £15,000 or default on the property and lose all your equity (you won’t be able to sell the property as the sale amount won’t cover the loan due to the price dip).
Is Now A Good Time To Invest In Property?
If you’re following up to now then you’ll know these three key points:
- Property prices can dip as much as 30%, depending on your location, when the market crashes.
- Rents stay the same even when the market dips
- Falls in property prices lead to negative equity and the potential for defaulting on your mortgage as you no longer meet the loan to value requirements set out in your finance T&C’s.
I’d like to add one more key point that I haven’t mentioned so far…
- Interest rates are at an all time low.
You might be thinking buying when prices are high is full of pitfalls and that’s true. BUT as long as you understand your worst case scenario and prepare for it now can still be a good time to invest in property.
Before you invest make sure that…
- You check out the terms and conditions of your mortgage agreement so that if prices do fall you won’t trigger a revaluation based on a minimum loan to value clause (even consider a lower LTV than the minimum to give yourself some wiggle room – 40/60 for example)
- There’s enough cash flow in your deal to soak up multiple interest rate rises – read how to stress test your deals here.
- You will be able to wait out wait it out for a recovery to take place – knowing that depending on the area you’ve invested this could take 10+ years to come about.
- You have enough capital on hand to maintain the property and even improve it should you be facing a long void period at any point.
- The investment your making still represents a good return relative to what’s available in other assets.