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The current average value of a property in Docklands currently stands at £515,800 and the base rates at 0.5%. In many of my articles, I talk about what is happening to property values over the short term (i.e. the last 12 months or the last 5 years), but to answer this question we need to go back over 40 years, to 1975. 

The average value of a Docklands property in 1975 was £24,971


However, since 1975, we have experienced in the UK, inflation of 807.5%.

Back in 1975, the average salary was £2,291 and average car was £1,840. A loaf of bread was 16p, milk was 28p a pint and a 2lb bag of sugar was 30p. Inflation has increased prices, so comparing like for like, we need to change these prices into today’s money. In real spending power terms, an average value of a Docklands house in 1975, expressed in terms of today’s prices is £226,639. 

That means in real terms, property costs a lot more today, than in the mid 1970’s, but has it always been that way? Looking at the important dates of the UK property market, you can see from this table, the last two property boom years of 1989 and 2007, show that there was a significant uplift in the cost/value of property (when calculated in today’s prices).




Before we move on, hold onto the thought that you can quite clearly see from the table, in real terms, properties are cheaper today in Docklands than they were in 2007!

So, it made me wonder if there was a link between house prices, inflation and other external economic factors, such as interest rates? Interest rates have a strong influence on inflation and property values, principally because changes in the interest rate affect the cost of mortgage payments for homeowners and they affect the flow of foreign currency in (or out) of an economy, thus changing the exchange rate and prices we can sell our goods and services abroad and prices we pay on imports.

So how exactly do interest rates affect property values?

When interest rates rise, it has a substantial effect on increasing the monthly cost of mortgages. Higher mortgage payments will discourage prospective homebuyers or people looking to move up market (meaning their mortgage payments go up) – thus making it comparatively cheaper to rent.

Furthermore, the high cost of mortgage payments sometimes also pushes some existing home owners to sell, meaning there is an increase in house sellers and a decline in house purchasers, and as the law of economics state, when supply is increased and demand falls, (house) prices fall. Another fallout of a rise in mortgage payments is a rise in repossessions. Interestingly, repossessions in the UK rose from 15,000 per annum in the late 1980’s to over 75,000 per annum in the early 1990’s, meaning even more properties came onto the market, exasperating the issue of over supply – pushing property values even lower. 



High interest rates caused property values to fall in mid 1970’s, early 1980’s and most recently, the early 1990’s (who can remember the 15% mortgage rate!) Conversely though, the drop in property values in 2008/2009 – was not due to interest rates, but due to the credit crunch and global recession.

So, what will happen now interest rates have risen?

It is vital to remember that interest rates are not the only factor affecting property values. It is also possible that when interest rates increase (which they will from the current 0.5%), property values can also continue to rise (it happened throughout the mid to late 1980’s and again between the boom years of 2002 and 2007). When confidence in the economy is good, and we as a Country experience a period of rising real incomes (i.e. after inflation), then the British in the past have continued to buy bricks and mortar, notwithstanding the rise in interest rates. 

Another important factor on property values is the supply of housing. A big reason in the current level of Docklands house prices is due to the shortage of supply, which has kept property values higher than I would have expected. An additional factor is whether homeowners have a variable or fixed rate mortgage. 90.6% of new mortgages taken in the last Quarter were at a fixed rate, and 66.2% of all mortgaged homeowners are on fixed-rate mortgages, therefore, they will not notice the effects of higher interest rate payments until they re-mortgage in a few year’s time, meaning there is frequently a time-lag between higher interest rates and the effect on property values. Another factor on mortgages is the ability to get one in the first place. Back in 2014, mortgage providers were told to be stricter on their lending criteria when arranging mortgages following the footloose days of 125% loan to value mortgages with the Northern Rock. These new rules are a lot more rigorous on borrowers' ability to repay the payments (although it makes me laugh, when with starter homes it nearer is always cheaper to buy then rent!).

I think the final point is this … affordability is the key. Look at the graph (the red bars) and you will see in REAL HOUSE PRICE terms – it’s cheaper to buy a home today than it was in 2007, yet why aren’t we seeing people buying property at the levels we were seeing in the 2000’s before the credit crunch? Again, looking at the reasons why, I will talk about in future articles.

In conclusion, interest rates are important – but nowhere near as important on the Docklands (and British) property market than they were 15 or 20 years ago.

So, before I go, one final thought - how do we measure the success of the Docklands property market? Well I believe one measure that is a good bellwether is the number of property transactions, as that could show a more truthful picture of the health of the property market than property values. Maybe I should talk about that in an up and coming article?


Should you, as a landlord for buy to let or for personal occupation, buy a brand-new home?

Well, let’s start by looking at the numbers …

Over the last 10 years, 12,396 new homes have been built in the Tower Hamlets borough

That is a lot of bricks and mortar! Roll the clock back twenty years in the Docklands property market, and there were two distinct camps of property buyers - folks who would only contemplate living in period character properties with their original fireplaces and beams, and those people who preferred the low maintenance of a new home. Old period homes were ridiculed as money pits by new-home aficionados, while new-home owners were accused of buying boring boxes, all vanilla, all the same, homogenous and bland.



However, it’s not as black and white as that anymore – or not as I see it in Docklands. New homebuilders are now trying to change their cookie-cutter uniform rows of suburban boxes into developments that are as individual as the families that love in them, thus increasing their appeal. Nonetheless, whether you choose a stone cottage, archetypal Victorian semi or terrace, 1970’s/80’s functional home or a untouched new home, whatever home you buy, it can result in supplementary costs that are often not taken into math’s when buying by potential homeowners or buy to let landlords.

So looking at the numbers in greater detail, let’s see what type of new homes people have been buying in Docklands and the wider local authority area ..



I thought the mix of what was built/bought locally over the last 10 years when compared to the national figures was fascinating … it’s interesting (but not surprising) to see a greater proportion of flats built locally and fewer detached/semi detached homes being built, when compared to the national averages. This is because of the nature of the Docklands area, its position in the country, the availability of building land, planning restrictions by London Borough of Tower Hamlets Council and the price of building land.




So, should you buy a new home (because a lot of people locally have over the last ten years)?

Well if you are considering new, take care when buying one, as often the show home isn’t the actual property you end up buying. It’s like visiting the car showroom and falling in love with the model in the showroom (which is spec’d up to an inch of its life) – only to get the base model when handed the keys. Look out for things like curtain rails, tv aerials (or lack of them), kitchen appliances, carpets and curtains … and outside – make sure you aren’t unwittingly buying a square piece of earth instead of the manicured landscaped gardens.

New homes are a lot more efficient on energy consumption compared to the old drafty, high fuel bill Victorian semis, as their owners can testify. Older properties will have maintenance issues, with 100yo brickwork and roofs that might need replacement and extra insulation, rotten wooden windows and a dodgy central heating boiler (all sounding rather a strain on your bank balance if you weren’t aware). The point I am trying to get across is open your eyes and don’t assume .. ask questions and get a surveyor to make a detailed inspection of the property so you know what you are getting yourself into. 

Next, I also wanted to break down the new home stats to each individual year in our local area to see if there was a pattern to when people bought a new home. As you can see, there hasn’t been an obvious pattern in the sale of new homes. Looking at the much larger second hand housing market in Docklands over the same 10 years, the coloration between the new homes market and second market has been quite strong – which shows the new home builders don’t make (or break) the Docklands housing market – just follow it (although with the planned building locally in the next 10/20 years – who knows if that will continue to be the case?).



So, should you buy brand-new or second hand? If price is your sole motivator, then new homes are always CHEAPER when the economy is bad. However, in normal and good housing market conditions, you will pay a ‘new build premium’. The Royal Institute of Chartered Surveyors admits that this can be as high as 10% extra, when compared to a similar second hand property – so be aware of that (it’s like paying extra for a new car and losing a bit (or a lot) of money as soon as you drive off the forecourt). Although, it’s not always about pure pound notes.

Older houses are bigger (more room) yet take more money to heat. Older houses have bigger gardens (to enjoy) – but you will spend more time tending to them. Older houses are in more established areas (with more facilities), whilst everyone is starting afresh on new homes. It all comes down to personal opinion. One final thought though, at least with new homes there is no gazumping or no upward chain to ruin any sale completion dates …

The choice as they say … is yours!

 

My analysis has shown that up to the end of the last quarter, Docklands first time buyers purchased 207 Docklands properties.  With wages rising at 2.8%, unemployment at a low rate of 4.2% (down from 4.6% from a year earlier and the joint lowest since 1975), national GDP rising at 1.87% and inflation at 2.3%, tied in with indifferent house price growth (compared to a few years ago), this has given first time buyers a chance to get a foot hold on the Docklands property market.
Over the last year, the average purchase price of a Docklands first time buyer property has been £425,400 and the average deposit was £68,915. Furthermore, my calculations show the average Docklands parents contributed £30,150 of that £68,915 figure.
You see “The Bank of Mum and Dad (Docklands Branch)” is for countless Docklands twenty something’s,perceived to be the only way they will ever be able to afford their first home. In fact, Docklands parents put up a substantial £6.22m in the last 12 months to help their nearest and dearest progeny onto the property ladder. This assistance towards the deposit makes a huge difference, enabling Docklands youngsters who thought they couldn’t get on the housing ladder more able to do so.
With mortgage rates at all-time lows, few Docklands twenty something’s would struggle to make mortgage repayments, but it is the requirement of the deposit which is the issue, although as parents (and grandparents) are helping out where they can, it does little to address the real problems of the housing market, whether for people renting or buying their first home.
If you think about it, as a Country we have been fortunate that the older generation who control the biggest share of the nation’s wealth are so plentiful to those following after. We need to remember, though, that this generosity is
 a sign of the issues of the British housing shortage, not its solution.
But before I leave this article … note I used the word PERCEIVED in a previous paragraph. Yes, the average first time buyer deposit is 16.1%, but that is an average. Did you know 95% mortgages returned to first time buyers in late 2009 and have been available ever since? Also, lenders like Barclays and many local Building Society’s now offer 100% mortgages (i.e. no deposit) at 2.75% fixed for three years.
The perception is you need 15%, 20% even a 25% deposit to be a first-time buyer – you don’t! You don’t need any deposit, but (there is always a but!)...
Over the last decade, many renters have upgraded themselves into homes that they (or any generation before them) could never have ever afforded as a first time buyer in the past. You see the British housing market started to change with the dawn of the new Millennium and I am seeing a slow but steady attitude change when it comes to renting. Those tenants have found the price difference of upgrading from the typical 1970’s TV show Rigsby “Rising Damp” style rental property to plush terraced house or even semi-detached home, with all the mod cons, comparatively inexpensive (when compared to the increase in mortgage payments if they had to make the move as buyers).

Renting isn’t seen as the poor man’s choice, as many young (and increasing older) people are becoming more at ease and comfortable with the flexibility offered by private renting a property rather than jumping ‘lemming like’ into home ownership. Docklands landlords will continue to see growth in sector, and like Germany, todays renters will become homeowners in 20 years’ time – when they will inherit the wealth of their parent’s home.

My analysis has shown that up to the end of the last quarter, Docklands first time buyers purchased 207 Docklands properties.  With wages rising at 2.8%, unemployment at a low rate of 4.2% (down from 4.6% from a year earlier and the joint lowest since 1975), national GDP rising at 1.87% and inflation at 2.3%, tied in with indifferent house price growth (compared to a few years ago), this has given first time buyers a chance to get a foot hold on the Docklands property market.
Over the last year, the average purchase price of a Docklands first time buyer property has been £425,400 and the average deposit was £68,915. Furthermore, my calculations show the average Docklands parents contributed £30,150 of that £68,915 figure.
You see “The Bank of Mum and Dad (Docklands Branch)” is for countless Docklands twenty something’s,perceived to be the only way they will ever be able to afford their first home. In fact, Docklands parents put up a substantial £6.22m in the last 12 months to help their nearest and dearest progeny onto the property ladder. This assistance towards the deposit makes a huge difference, enabling Docklands youngsters who thought they couldn’t get on the housing ladder more able to do so.
With mortgage rates at all-time lows, few Docklands twenty something’s would struggle to make mortgage repayments, but it is the requirement of the deposit which is the issue, although as parents (and grandparents) are helping out where they can, it does little to address the real problems of the housing market, whether for people renting or buying their first home.
If you think about it, as a Country we have been fortunate that the older generation who control the biggest share of the nation’s wealth are so plentiful to those following after. We need to remember, though, that this generosity is
 a sign of the issues of the British housing shortage, not its solution.
But before I leave this article … note I used the word PERCEIVED in a previous paragraph. Yes, the average first time buyer deposit is 16.1%, but that is an average. Did you know 95% mortgages returned to first time buyers in late 2009 and have been available ever since? Also, lenders like Barclays and many local Building Society’s now offer 100% mortgages (i.e. no deposit) at 2.75% fixed for three years.
The perception is you need 15%, 20% even a 25% deposit to be a first-time buyer – you don’t! You don’t need any deposit, but (there is always a but!)...
Over the last decade, many renters have upgraded themselves into homes that they (or any generation before them) could never have ever afforded as a first time buyer in the past. You see the British housing market started to change with the dawn of the new Millennium and I am seeing a slow but steady attitude change when it comes to renting. Those tenants have found the price difference of upgrading from the typical 1970’s TV show Rigsby “Rising Damp” style rental property to plush terraced house or even semi-detached home, with all the mod cons, comparatively inexpensive (when compared to the increase in mortgage payments if they had to make the move as buyers).

Renting isn’t seen as the poor man’s choice, as many young (and increasing older) people are becoming more at ease and comfortable with the flexibility offered by private renting a property rather than jumping ‘lemming like’ into home ownership. Docklands landlords will continue to see growth in sector, and like Germany, todays renters will become homeowners in 20 years’ time – when they will inherit the wealth of their parent’s home.

 


 
I am of the opinion that buy to let investment in Docklands, in the long-term, will bring substantial returns for landlords, irrespective of latest regulation and tax changes. 

Taking a very conservative (with a small ‘c’) view, I believe landlords will see a projected net profit of £773,302 per property over the next 25 years through capital gains and rental. When inflation is taken into account that works out at £455,475 (in today’s money) or around £18,219 per year. The breakdown applies to a basic tax-paying landlord placing a characteristic 25% deposit on a £353,800 apartment.

Capital gains make up a substantial part of a landlord’s returns. Again, being conservative, I have assumed that Docklands house prices over the next quarter century (between 2018 and 2043) will rise at half the rate they did between 1993 and 2018 (the preceding 25 years), therefore the example Docklands property in the previous paragraph would grow in value to £1,104,227, providing gross capital gains of £750,427.

A typical Docklands landlord receives, on average, rent of £12,000 per annum per apartment and so, over a 25-year period, that example property would generate a total rental income of £458,700 (again – very conservatively assuming a compound annual growth rate in the rent of 1.71% per annum).

Nevertheless, there are costs to running a buy to let property (mortgages, void periods, repairs, agents fees etc) .. and over those same 25 years, I have estimated that to be £435,826 .. giving the net profit levels mentioned in the second paragraph.


Now of course I have had to make assumptions to reach these figures, yet I hope you would agree, I have been very unadventurous with my assumptions.

The Docklands (and UK as a whole) buy to let property market is experiencing a massive sea of change. Regulation and tax changes have altered the dynamic in the property market, diminishing its appeal to inexperienced and amateur landlords, and these new tax changes mean higher tax bills for higher rate tax landlords. Yet, despite these rising costs, there are still healthy returns to be found in Docklands buy to let investment for knowledgeable and steadfast landlords. Nonetheless, the days of anything making money and idle speculation are long gone. 

Buy to let is a long-term business undertaking, necessitating commitment and expertise. Don’t put your head in the sand and think it doesn’t affect you. Docklands buy to let landlords must be equipped to start business and tax planning, take portfolio management advice to ensure their investments will meet their investment goals, appreciate the risks as well as the rewards, and, most crucially, the obligations they have towards their tenants.

If you are a Docklands landlord, irrespective of whether you are a client of mine or another agent in Docklands (or even you do it yourself), feel free to drop me a line or pop into the office for an informal chat on the future direction of the Docklands rental market and where opportunities may lie.
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