Property prices follow a cyclical
pattern. Property prices rise and thenproperty prices fall. The reasons why
will become apparent further on,but for some reason they do rise and then fall.
So what is the best time foran investor to become interested? When the prices
start to rise, of course!If we were to speed up this process over a notional
12-hour period, with12 noon being the point when they first rise and 6 o’clock
being the pointwhen they first start to fall, then we would have the following
diagram:
At 12 noon prices increase until 6pm and then they start to fall.
We
can see that anyone who has any sense gets interested anywhere
between 12 noon and 6pm. So who buys between 12 noon and 6pm?
Everyone! Who is everyone and why do they buy? The following
people buy exclusively and their reasons are as follows.
can see that anyone who has any sense gets interested anywhere
between 12 noon and 6pm. So who buys between 12 noon and 6pm?
Everyone! Who is everyone and why do they buy? The following
people buy exclusively and their reasons are as follows.
Professional property investors
A professional property investor
will
buy a property which will enable them
to buy other properties and put money
in their pocket. It will enable them to
benefit from capital growth so that
they can remortgage and buy further
properties, and when rented out it will,
after voids, letting agent’s fees, tax
and other expenses, provide a positive
cashflow.
buy a property which will enable them
to buy other properties and put money
in their pocket. It will enable them to
benefit from capital growth so that
they can remortgage and buy further
properties, and when rented out it will,
after voids, letting agent’s fees, tax
and other expenses, provide a positive
cashflow.
Novice/speculative investors
A novice/speculative investor will
invest
in a growth area because they will
believe that the trend upwards in price
will continue. They are less concerned
in fundamentals as they are not aware
of the fundamentals – they simply
believe that the trend is upwards.
in a growth area because they will
believe that the trend upwards in price
will continue. They are less concerned
in fundamentals as they are not aware
of the fundamentals – they simply
believe that the trend is upwards.
Owner-occupiers
The owner-occupier will buy
because if
they delay buying it will cost them
more. So it is in their interest to buy
sooner rather than later as their overall
purchase price will be higher the
longer they leave it.
they delay buying it will cost them
more. So it is in their interest to buy
sooner rather than later as their overall
purchase price will be higher the
longer they leave it.
So who buys between 6pm and 12 midnight? Prices are falling now
so the novice/speculative investor becomes uninterested as there are
no capital growth prospects and the owner-occupier will wait until
the prices drop further. The only buyer remaining is the professional
investor.
so the novice/speculative investor becomes uninterested as there are
no capital growth prospects and the owner-occupier will wait until
the prices drop further. The only buyer remaining is the professional
investor.
Professional property investors
The only time a professional
property
investor will buy in this market is if the
investment puts money in their pocket.
They will invest in a falling market due to
the property market providing a better
return on their other investments such as
the stock market, other businesses or a
bank or building society. It is the
professional property investor who
prevents the property market falling to
nothing. It is the professional investor
who provides the cushion to the fall.
investor will buy in this market is if the
investment puts money in their pocket.
They will invest in a falling market due to
the property market providing a better
return on their other investments such as
the stock market, other businesses or a
bank or building society. It is the
professional property investor who
prevents the property market falling to
nothing. It is the professional investor
who provides the cushion to the fall.
Based on the table above we can see that:
■ The professional investor buys on known information i.e. the
property purchase puts money in their pocket.
■ The novice/speculative investor and owner-occupier buy based
only on the fact that the trend of prices is rising.
So how does the professional investor estimate whether a property
will put money in their pocket? It’s called gross yield. Gross yield, in
mathematical terms, is:
■ The professional investor buys on known information i.e. the
property purchase puts money in their pocket.
■ The novice/speculative investor and owner-occupier buy based
only on the fact that the trend of prices is rising.
So how does the professional investor estimate whether a property
will put money in their pocket? It’s called gross yield. Gross yield, in
mathematical terms, is:
Now annual rent is a pretty static figure. Rents do not rise and
then
fall. They simply rise slowly and steadily the same way wages do. So
in real terms they remain the same. However, property prices are far
more volatile. Property prices gather momentum far in excess of the
rate of wage inflation and hence rise and fall at a greater rate than the
rate of inflation – but we will get to that later.
Assuming we agree with the stability of rental prices and the
volatility of property prices.
fall. They simply rise slowly and steadily the same way wages do. So
in real terms they remain the same. However, property prices are far
more volatile. Property prices gather momentum far in excess of the
rate of wage inflation and hence rise and fall at a greater rate than the
rate of inflation – but we will get to that later.
Assuming we agree with the stability of rental prices and the
volatility of property prices.
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