There’s no doubt residential property has been a great investment over the past 20 years or so, but the landscape is quite different today, particularly for residential property investors.
Is Investment In Residential Property All It’s Cracked Up To Be?
How Residential Property Has Grown In Value
Residential property has grown in value by an average of 6.32 per cent per year since 1995.
And that’s a pretty good return. It’s certainly well above inflation, measured by the Consumer Prices Index, meaning that the real buying power of your money has increased over the years.
But as an investment, compared to a basket of global shares and a basket of UK shares, it’s a bit of a poor relation, as you can see from the table below.
The post-war Baby Boomer generation has done particularly well with residential property. Estimates suggest they’re sitting on total residential property values of more than £1 trillion.
It’s no surprise really. Residential property is a simple investment, compared to say investing in shares, which can require a significant level of due diligence if you’re going to actively manage your portfolio. It’s very different if you’re into passive investing.
If your residential property investment is your principal residence, your capital gain is tax free. That stacks up well compared to direct investing in shares.
Of course, if you’ve invested in shares via a SIPP, or a SSAS, or a stockmarket ISA, your gains would also be tax free.
Your Home As A Residential Property Investment
Whilst making money in residential property over the past quarter of a century has been a given for the vast majority of people, it’s not always that easy to get the money out.
Many people intend to sell up as they approach retirement or during it, expecting to release capital to put towards their retirement plans. But a surprising number have discovered it doesn’t quite work out like that.
Moving home is an expensive business. That is, if you can find a buyer at the right price in these uncertain times of Brexit and Trump.
Many people discover it’s actually quite nice to have an extra bedroom or two for when the children and grandchildren come to stay.
Renting out a room or two to supplement your income isn’t always desirable, and can bring its own issues.
Equity release solutions usually only work if you have absolutely no-one to whom you want to pass on your assets after you’ve gone.
You don't bump into these concerns with a share portfolio, which is highly liquid. Although it is, of course, subject to market conditions, which could mean you don’t always get the best price when you want to cash out.
Residential Property As An Investment
The situation is quite different if you look at residential property as an investment outside of your principal residence.
It’s been three years since Gorgeous George Osborne announced a tax raid on landlords. He said the move was designed to support home ownership amid claims that landlords were making it difficult for first-time buyers to get onto the residential property ladder.
Since that time, it’s been quite an onslaught on residential property landlords, to say the least.
The Government slapped a 3 per cent surcharge on stamp duty payable on new buy-to-let purchases from April 2016.
The introduction of the Section 24 rule has meant landlords have begun to lose their mortgage tax relief, forcing them to pay tax on their rental income, rather than just on their profit after mortgage costs.
And the Bank of England has clamped down on mortgage lenders, requiring landlords to earn a much higher ratio of rental income compared to their mortgage payments. Further rules have been introduced for landlords with four or more mortgaged properties to ensure their debt levels are not too high.
The net result of these attacks, coupled with high residential property prices, has significantly reduced the number of people getting into buy-to-let. It has also encouraged a very large number of smaller landlords to take profits and sell up.
Rental Supply Set To Fall As Residential Property Landlords Exit The Market
More than half of UK investors no longer view property as a good investment, according to research in 2018 by Rathbone Investment Management. It found many investors are now re-evaluating the cost-effectiveness of residential property as an investment.
Research by the National Landlords Association discovered that 20 per cent of its members plan to reduce their portfolios in 2018. It reported that up to 380,000 landlords are looking to sell residential property in the near future.
Around one half of these residential property landlords will dispose of individual flats and apartments, with a third looking to sell a terraced home. This is bad news for renters.
The National Landlords Association suggests this might be good news for first-time buyers. But many of them aren’t in a position to buy, given that mortgage lenders generally require substantial deposits.
It could lead to a significant fall in the supply of property available to those who choose to rent, or have no other option but to rent.
The National Landlords Association has produced a discussion paper on the subject, and a video as you can see below.
It’s Not All Doom And Gloom For Residential Property Investment
There’s significant evidence across the UK that whilst ‘one and two residential property’ landlords are getting out, professional landlords with five or more residential properties appear to be expanding their portfolios.
At the same time, they are raising standards to command a higher level of rent.
This very point was made in a short interview by This Is Money, in the video below.
By way of an observation, the current trends in residential property appear to be moving in the direction that George Osborne had hoped.
As change usually creates winners and losers, whether this is good news or bad news for the residential property market is a matter of debate!
Please Share This
If you’ve found this page of interest, please would you kindly send a link to it to your friends and colleagues using the buttons below. You’ll be helping us out, and they might like it too. Thanks, it's much appreciated.
AJ Bell Is Often The Best Value SIPP For Stockmarket Assets
Over time, charges can wipe out a huge part of your fund. We like AJ Bell because there are no set-up costs. If you hold passive funds, which is our preference, or shares, investment trusts, EFTs, gilts or bonds, you pay one small fixed fee no matter how large your fund. And when you come to draw your benefits either as occasional drawdown or UFPLS payments, there's a small charge for the whole year no matter how many times you access your money (many SIPP and SSAS providers charge more than this for each payment). However, you should always compare charges in detail, because AJ Bell could be more expensive than other providers, depending on the type of stockmarket assets you hold.
Get Valuable SIPP And SSAS Insights Emailed Directly To Your Inbox Every Monday
As SIPPclub neither advises on, nor arranges, nor recommends specific investments or strategies, we're unable to say whether a SIPP or SSAS or any investment within it is right for you. Ultimately, it’s your money and your decision, and you should only proceed once you're satisfied you've undertaken sufficient due diligence. If you need advice, you should speak to your trusted adviser, or you could find a local adviser from Unbiased.co.uk. Alternatively, we'd be pleased to introduce to a suitably qualified independent financial adviser.
Please read our full Terms which includes criteria for SIPPclub membership.