Making the most of your money in 2005

Against all odds, could there still be good news to come for the housing market in 2005?

Despite what the press may say, all is not necessarily gloom and doom in the housing market as we start the new-year.

Although it has become a newspaper circulation based obsession for the Daily Mail to talk down the property market, any dip in prices and market activity may well be short lived thanks to a number of converging factors.

Interest rates to drop to 4%?

Talk of an overstretched relationship between average earnings and house prices ignores the fact that interest rates are still at historically low levels. This means that there is a greater ability to support higher borrowing than during previous housing cycles and the prospect of Bank of England reducing base rates to an estimated 4% by the end of this year can only further ease any tension between these two measures. Further underpinning demand is the fact that mortgages are now far more easily accessible and the market more competitive than in the past. Higher multiples of income are now achievable and there is also far greater access to large loans for the growing ranks of self employed and contract workers via specialist mortgage underwriting and self cert lending.

Buy to Let optimism continues

There is ongoing support for the market from the legions of canny buy to let investors who, shunning volatile equities based investments, have collectively ploughed billions of pounds into building investment property portfolios. Levels of private rental ownership are now at levels not seen since landlords were forced out of the market by rent controls in the 1960s and 70s. Many far sighted freelancers seem particularly attracted to the prospect of this potential rental income stream and view it as a viable exit strategy from the demands of a lifetime of freelancing. Reduced activity in the owner occupied sector has forced thousands of would be buyers into rented accommodation, inevitably filtering through to increased rental yields. These improved returns have made buy to let mortgages easier to apply for and service and landlords are using the current lack of buyers in the market to snap up properties more cheaply. Buy to Let represents a unique way for private individuals to ‘gear’ a long term investment, from which they enjoy the fruits, yet which they have largely used the banks money to fund.

Pension investment to boost housing market

Looking forward to next year there are also colossal sums waiting to hit the property market when the Inland Revenue abolish current rules and allow residential property to be held within a pension fund for the first time. Demoralised equities investors are expected to jump at the chance of switching to an asset class that they have already watched double in value over recent years. It will be possible to hold property both in the UK and abroad, very tax efficiently within the pension and once again investors have the opportunity to increase the size and likely impact of any investment by way of a gearing using a mortgage. Many clients are taking steps now to restructure their pensions ahead of these new opportunities. Of special interest are details emerging that mean there will be huge scope to pass the pension fund down the generations, ultimately opening up the prospect of avoiding inheritance tax on any property held within these arrangements.

The evidence is therefore far from convincing from those who suggest that the housing market is set for a major correction in 2005 and whilst the meteoric rises of recent years are unlikely to continue, talk of an early 90s style slump seems overplayed. The Great British love affair with property looks far too engrained in our psyche to be dented by a few gloomy headlines and for the brave there may be bargains to be picked up in the coming months.

Mortgage competition increases

The undoubted priority for freelancers must be to ensure that the financing of any property remains at the most competitive interest rate possible. With fewer purchasers around, banks and building societies will be even keener to attract new business by poaching borrowers from their competitors and we are already seeing loss leading remortgage rates from several of the big players, eager to kick start their 2005 sales campaigns. With 2 million borrowers facing the prospect of the expiry of fixed and discounted rates or of annual adjustments to mortgage interest payments, there will be an unprecedented battle to attract those borrowers who are willing to seize the opportunities to make savings on their mortgage costs. The lenders may refer to such mercenary borrowers as ‘rate tarts’ but this really is a case of playing the lenders at their own game to achieve the best results.

In 12 months time, when we look back over 2005, we may be able to agree that some sanity has returned to the markets again but that fundamentally there’s still “nowt like bricks and mortar” for long term returns and security.


12th January 2005

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