Author: David Lawrenson, 15 June 2007.
Property expert David Lawrenson is warning property investors that there is more money to be made buying houses than flats.
David from leading
buy to let consultancy Letting Focus, says, “They say the key to property
investment and
buy to let success is location and buying the right property at the right price. That is true and always will be.
However, population changes and demographic shifts are becoming more important and can mean the type of property you buy is just as important in determining
investment success or failure.
And, in general, demographic changes and over-supply of flats has meant that over the last few years, houses have proved a better
investment. And this won’t change soon.”
Households on the increase
He goes on to say “Each year there are more of us and with increased life expectancy, inward migration and higher divorce rates we need more places to live in too. In fact, the number of households in England is expected to grow from just under 21 million to around 26 million by the year 2026, an increase of well over 200,000 a year."
But with only 170,000 new homes being built annually there is excess demand - part of the reason for increased house prices and rents.
And with 60% of the projected household growth will be in London, the South east and South West, the squeeze is harder in these areas.
Indeed, The London Housing Federation recently predicted that London house prices may increase by as much as 34%, reaching £400,000 by 2011, an increase of around 7% a year from its current level of around £300,000.
Who is renting?
Lawrenson says “Too many new landlords think its just young people and couples who rent. It seems that a new sector of tenants is coming through – working families. Recent research (from the Alliance & Leicester) has found that nearly a quarter of families are now renting or still living with their parents and for over half of these, this is a lifestyle choice. In other words they are renting because it suits how they live, not because they can’t afford to buy.
There are thought to be about 17 million adults not on the property ladder and statistics from the
mortgage lender Abbey show that about 6 million of these could afford to buy but did not want the commitment.
And so, the A&L predicts the trend for family renting will contribute to the private rented sector growing by 39 per cent by the year 2014.
Of course, most families will prefer a decent sized house with a garden. However, they may be disappointed.
Too many flats
The problem is partly down to Britain’s past planning policies which led to builders building flats rather than houses. (The Government’s old planning guidance led to too much higher density development and too many flats even though demand for them was low.)
So it’s no surprise then that the statistics I receive continue to show that not only are the prices of houses going up faster than flats but they are renting better too. Buy to let investors should take note."
On prices, in a recent report, the Royal Institution of Chartered Surveyors said, “Larger and mid range property types have shown disproportionate price gains compared to under performing flats, with the largest variation of performance apparent since 2001.”
Specifically, they noted that Pre 1960 houses with two or three bedrooms were “leading the way with the largest price rises for almost two years.”
Houses more flexible
On rents, recent figures from the lender Paragon show that gross rental yields on houses are about 6.3% compared to 5.5% for flats.
So, it’s not just on capital gains that houses are showing up well on - its good rental growth too.
And stamp duty works tends to exacerbate the problem - reducing the supply of family homes because of the jump to 3 and then 4 per cent in the rate applied for homes worth more than £250,000 and £500,000 respectively.
This may partly explain why back in the 1980s people bought a house every 10 years or so - but now the figure is closer to once every 20 years.
Also houses can be more flexible. They can be used to house sharers, families or students - thus giving the landlord more flexibility on type of tenant than is possible with a typical flat.
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