Sun. Dec 31st, 2023

Compared to other developed countries like Switzerland and Japan, as well as the United States, house prices have increased in Britain at a rate that is at least ten times higher on an annual average. According to research by the right-wing think tank Policy Exchange, since 1970, prices have increased by an average of more than 4% annually above inflation.

13 years in a row have seen an increase in British property prices, with the most significant increase occurring in the last ten years. Since Labour took office in 1997, the average home’s price has increased from £70,000 to almost £200,000. The retail price index only increased by 30% during that time.

Should landlords sell & lock in gains

All of this would seem to indicate that a landlord should sell now in order to lock in the capital gains they have accrued from their residential buy-to-let investments over the past few years.

However, it isn’t always obvious whether an asset is overvalued from a simple analysis of numbers that demonstrate how much its value has increased. Anyone who has followed the rise in gold’s price over the past few years as an investor can attest to that. Landlords who saw the value of their investments in real estate double in the early years of the millennium and then continue to spiral upward until the end of 2007 would have lost out on significant capital growth if they had taken such a view and sold.

It takes much more than saying “prices have gone up significantly, so it’s time to sell” to determine the true value of housing and residential property investments.

Understanding the elements that influence the housing market and the value of residential investments is crucial for landlords.

A significant element is affordability.


The reality is that buy-to-let investing takes place in a housing market that is still dominated by homeowners. As a result, affordability is a crucial consideration in determining a property’s price, especially for the vast majority of buyers who are purchasing a property for their own use.

The ratio of average income to property value has traditionally been the key indicator. The average household income used to be about 3.5 times this in the past; today, it is over 6. Some economists contend that the paradigm shift in long-term interest rates, which has made higher multiples more sustainable, renders this measure obsolete.

Interest rates were typically near double digits in the 1980s and around 6-7% in the 1990s. This is still high by current standards, especially given that mortgage margins have decreased, i.e. the differential a borrower pays above the prevailing base rate. Prior to the recent credit crunch, it was as low as zero in some cases, down from a range of 1-2% in the 1990s, further lowering the real costs of a mortgage. Even now, despite the “credit crunch,” it is still possible to obtain a lifetime tracker at 6.39%, or 0.89% above the Bank of England base rate.

House price “Bulls”

The proportion of household income spent each month on debt servicing is what the housing “bulls” (those who still think the market is rising) argue is more important when determining whether a home is affordable. People, they claim, do not consider multiples or margins when determining whether they can afford a property.

Their first considerations are the monthly cost and their remaining income after taxes and other important household expenses. The statistics provided by the Council of Mortgage Lenders (CML) can give us an idea of this. These statistics are fascinating to read. The good news for “bulls” is that the most recent figures for interest payments as a percentage of median household income were 18.8% in November 2007, which is significantly lower than the 27.1% reached during the first quarter of 1990 at the time of the early 1990s housing market crash.

But it’s important to keep in mind that interest rates as high as 15% were what drove this high rate. What matters is that this number is rising and hasn’t been this high since 1992, when the housing market was still sluggishly wallowing in the abyss of the previous housing depression. These data, while not conclusive on their own, demonstrate that future increases in home prices are becoming increasingly constrained by the costs of servicing a mortgage.


Property investors have long favored the gross yield as a measurement.

Landlords with good memories might be able to recall a time when the gross yields on some investment properties were in the double digits. Many landlords could also obtain a respectable level of income from their residential investment properties until relatively recently. But those times are long gone for a lot of landlords in residential areas. Small rent increases have not been enough to keep up with rising capital values and interest rates.

The end result is that, according to the most recent Association of Residential Letting Agents (ARLA) review, UK average gross yields have decreased to less than 5%. When rental voids are considered, this figure drops to 4.6%. If management fees are also subtracted, the net yield is probably going to be below 4%. All of this means that many landlords are now faced with a cash outflow that will follow them for several years as rents rise and/or interest rates decline.

I should not sell because the house is “fully valued.”

The housing market in the UK appears to be fully valued, to sum up. So why not lock in your profits now by selling your property? Landlords must make a more complex decision than it might appear at first when deciding whether to sell a buy-to-let investment property. For instance, here are 5 things to consider before a landlord puts their buy-to-let property up for sale:

1 There is the small case of capital gains tax (CGT)

A new tax system with an 18% band for everyone is what the chancellor is proposing. Even so, that still represents close to a fifth of any profits a landlord has made. This will represent a significant portion of the asset’s total value if a landlord has owned the property for ten years or more, leaving them with significantly fewer assets to reinvest in alternatives after a sale.

2. It costs money to sell a residential investment property.

A landlord should expect to pay at least 1.5% of the property’s value when an estate agent is involved, plus legal costs and the new Home Information Pack (HIP). In some circumstances, such as with investment properties in London, this amount could easily rise to 2.5 or 3%.

3.Additionally, a landlord trying to sell their residential investment property is probably best off selling their buy-to-let property with vacant possession, i.e. without tenants.

By doing this, a landlord’s residential investment property should also appeal to the owner-occupiers who make up nearly 90% of the residential market. As a result, they are not receiving any rent while the investment property is being sold. When a landlord still has a mortgage, the situation can be especially painful because not only are they losing out on rental income, but also they are paying out “dead money” while the property is being marketed. Even worse, every property speculator and opportunist is aware of this and presumes that you, the landlord, are in trouble and need to downsize. So, unless you’re the fortunate owner of a “trophy asset” property, be ready for ridiculous offers—especially right now.

4. For security purposes, a lot of landlords also purchase homes.

Many landlords view having a second property as insurance against themselves or a member of their family becoming homeless in a world where family and romantic relationships are ending at an increasing rate. The outright sale of their buy-to-let investment property is a big step for many landlords to take because they spent a lot of time and effort purchasing, renovating, and setting up their buy-to-let investment.

5.What to do with any investment funds released after selling their residential investment property is the landlords’ other conundrum.

Many landlords have experienced “stings” as a result of prior stock or other asset class investments. These investments are much more volatile than those made in a physical asset like a residential investment property, despite the fact that the short-term gains may be higher. The base rate could be as low as 4.5% by the end of the year, significantly reducing the returns on cash investments. At the moment, cash savings are earning a respectable interest rate of around 6%, but most experts predict that rates will fall throughout 2008.

Long -term landlords

It is difficult for landlords to react quickly to changes in the housing market, which is the harsh reality. A good example would be to sell high now and wait a year before making a purchase. As a starting point, once estate agents’ fees, legal fees, and stamp duty have been taken into account, the transaction costs of buying and selling will likely total 5% of the initial investment. In addition, it takes time and effort to find a suitable residential investment property, negotiate a deal, and then prepare it for rental, not to mention find qualified tenants. This likely contributes significantly to the explanation of why, according to a recent Alliance & Leicester survey, landlords intended to hold their investment for an average of 18 years. This indicates that the majority of landlords opt for a long-term strategy and ‘ride out’ any short-term weakness in the housing market.

Financial sustainability & opportunities

The financial viability of their residential investment portfolio should be a top priority for landlords right now. Landlords should be cautious about future property price projections and concentrate on their cash flows.

A property market in a slump, which the UK housing market appears to be experiencing in 2008, will inevitably produce potential residential investment opportunities. If a landlord does their research well, does not overborrow, and invests in a “cash cow” using a traditional repayment mortgage, distressed sellers and repossessed buy-to-let investment properties sold at auction all make potentially excellent investments. As the tenant will be covering all expenses related to these investments, a landlord will be protected from any decline in residential values. Even during brief drops in residential property values, a repayment mortgage will provide a loan amount that is constantly decreasing, protecting a landlord’s equity.

Therefore, in my opinion, landlords who are considering selling should carefully consider their decision and make sure they are confident that it is the best one for them in the long run. Similarly, some landlords might want to view the current turmoil in the credit markets and decline in home prices as a long-term buying opportunity. That landlords can no longer rely on the quick increases in housing values to which they may have grown accustomed over the previous ten years is one thing we can say with certainty. Whether a landlord chooses to buy or sell, they should make sure that their investment strategy is updated to reflect this “new reality”.

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