WHEN TO INVEST
Determining when to invest is a very important investment factor. ‘When to invest’ refers to the timing of your investment. For example, if you invest in an inflationary market, this would erode your profit, since your aim is to buy ‘quantum property’ as low as possible and then add value. This is what gives your ‘quantum investment’ potency.
However, if there are economic conditions creating a downward pressure on property price, this is the time to buy. This is because in a falling market, there are more opportunities. For instance, in a downturn there are always motivated sellers looking to get rid of their property either because of debt or pending repossession. You can pick up a bargain if you time your purchase.
There are a number of factors to take into account when timing your property investment. They are as follows:
- The Economy & local property market
- Interest rate
- Consumer Confidence Index
(a) The Economy & Local property market
Getting to grips with basic ‘economics’ is fundamental when engaging in property investment.
I know that some people get scared when trying to understand the subject of ‘economics’. However, people use ‘economics’ everyday without knowing it. For instance, when you buy (or plan to buy) a property, you are making an economic decision. Taking out a mortgage involves assessing the interest rates. When the economy contracts and you see wages fall, the effect is felt by tenants and investors alike. There is therefore no getting away from the fact that you must understand basic economics.
How do you know when an economy is growing or contracting? The key barometer used to measure the state of the economy is GDP. GDP stands for “Gross Domestic Product”. GDP measures the value of all goods and services produced in the country. This data can be obtained from the Office for National Statistics (ONS).
The equation used to calculate GDP is:
C stands for Consumer Spending
G stands for Government Expenditure
I stands for Investments
X stands for Export
M stands for Import.
Thus, the GDP of a country is the totality of all consumer spending plus government spending plus business investment plus income from export minus expenditure for imports. The total figure arrived at is called the GDP. This represents the size of the economy in any one year.
In order to ascertain how fast an economy is growing, statisticians look at the GDP of one year and compare it with the previous year. The result may show that the GDP grew by, say, 7% or retracted by, say, 4%. If there are 2 or more successive quarterly decline in GDP, the economy would be classified as being in ‘recession’.
Economists have identified 4 phases of an economic cycle. The first phase is where the GDP is expanding. Here people are richer. They spend and borrow rashly. The next phase is the peak. Then the economy overheats. Interest rates are hiked. This affects businesses and borrowers, who then cuts back spending, sending the economy into recession. Price falls. This then forms the recipe for a recovery, which is the final phase.
People are more willing to invest when the economy is expanding and there is money floating around. But should you invest when he property market is falling?
My answer is a resounding yes. My reasons are as follows:
First, in an economic downturn there are opportunities. Downturns normally create motivated sellers, who are looking to get rid of their property either because of debt or pending repossession. You can pick up a bargain during this time.
Secondly, economic downturn, by its nature, effectively pushes prices downwards. This means you can buy properties below market value. History has shown that below-market –value properties tend to rebound during an economic expansion. So, buy these properties with along term view.
Land is a scarce resource in the UK. It was Mark Twain who, in the 19th century, said that “The thing about land is that they are not making any more of it”. So, since there is limited supply, any increase in demand for land would increase its price. Simple.
Lastly, in a recession, unemployment is normally high. This means there is likely to be a high supply of properties for sale but with little competition from investors. This creates a buyer’s market. Properties bought in these circumstances tend to be bought at a reduced price. This would give you a high rental yield. The high yield is created because you bought at a low price but your rent is high, giving you a good return on your investment.
Another factor to take into account when timing your investment is inflation.
Inflation is when too much money is chasing too few goods. It is a period of the general rise of the prices for goods and services in any one year.
There are a number of reasons why a nation suffers inflation. An increase in general demand for goods and services without a corresponding increase in supply would lead to price rise, namely inflation. This is called ‘Demand-Pull inflation’. Also, if the high cost of raw materials is being passed on by producers to consumers, this could also lead to inflation. This is known as ‘Cost-Push inflation’. The effect is the same, whether it is demand-pull or cost push inflation.
If you are looking to buy low-value property (i.e. ‘quantum property’) with a view to adding value by improving the property, then buying during inflation is the wrong move. This is because you would be buying at a higher price.
A deflationary period is ideal. Deflation is the opposite of inflation. This is a period of persistent fall in the general level of prices. At first sight, a period of deflation may create fear amongst some investors. This is because generally when people see that prices are falling, they tend to delay their spending in the hope that they would get things cheaper. As spending stalls, it weakens the economy.
However, as I have pointed out elsewhere in this book, property prices go up and down. However, if you take a long-term view, any property-price fall in the long term will rebound upwards. There are a number of reasons for this:
First, there is the constant increase of the UK population, which in turn puts pressure on housing, since people need a place to live. The data from the Office for National Statistics shows that, as at June 2014, the UK population stood at 64.6 million people – a rise of almost half a million since 2013. The number of foreign-born residents living in England and Wales also increased from 4.6 million to 7.5 million since 2001.
Secondly, there is a housing supply shortage in certain areas in the UK, such as London and the Southeast. In general, local authorities have stopped building houses and are selling off existing Council flats. They have left house building to the private sector. Housing developers have said that while they are building more homes, the industry is unlikely to meet government targets. The complex planning rules and procedure; hurdle to surmount when building on cheap brownfield land; and government taxes have all contributed to the shortage of housing. This is causing an upward push on prices.
Thirdly, the number of foreign buyers coming to the UK has increased significantly. This is also pushing up prices.
Fourthly, the government’s Help to Buy scheme is pushing price upwards after the credit crunch of 2008. More than 48,000 households have been helped by this scheme. The first phase of the scheme allows people to move on to the property ladder with a deposit of just 5%. Those with 5% deposit can borrow up to 20% of the value of a newly-built home from the government in the form of a loan that is interest-free for the first 5 years.
The second phase of the scheme applies to all properties (old or newly built) provided the cost of the house is less than £600,000. It is available to all. The second scheme works by providing a guarantee whereby the Government would underwrite any loss to the participating Banks in the event of repossession.
Lastly, there are some government policies which effectively cause prices to rise. Following a downturn in the economy, governments tend to pursue economic policies to kick-start the economy. For example, after the recession of 2008, the government introduced “Quantitative Easing” (QE). This effectively is where the central banks are buying government securities or other securities from the market. This mechanism has the effect of increasing the money supply by making cash available to banks, which in turn encourage lending to investors.
Since QE involves injecting money into the economy, it would eventually lead to a rise in inflation; and price would rise.
In view of the above, it can be seen that the time of economic downturn is the best time to search for excellent property deals.
(c.) Interest Rate
Another factor to take into account when timing your investment is interest rate.
When investors talk about interest rate, they almost always refer to the interest rate set by the Central Bank. In the UK, the Bank of England sets the interest rate.
This macroeconomic approach helps to concentrate on how the economy as a whole is doing, rather than looking at a small part of the economy (referred to as microeconomics).
The Bank of England handles the government’s monetary policy. This includes managing the money supply, ensuring financial stability, supervising the banking sector and setting the interest rate.
Setting the country’s interest rate is one of the most important tools used by the central banks to deal with problems in the economy.
As an investor, you need to know that changing the interest rate could have the following effect:
(a) The interest rate set by the central bank can influence the
interest rates private banks charge their borrowers. This
influences the interest you pay when you take out a mortgage.
If interest rate is low and you take out a mortgage, the interest
you pay the bank is likely to be low, making it the best time to
invest in low-value property.
(b) A low interest rate could also have an impact on property prices.
A cut in interest rate may lead to lower mortgage rates, which
would increase the demand for properties. This effectively
would push property prices up.
(c) The changes in interest rate could also affect people’s
confidence in the economy. Consumer confidence affects how
people behave and their spending pattern. (see below).
(d) Consumer Confidence Index
The Consumer Confidence Index is also another economic indicator, used by investors to gauge the sentiments and people’s confidence about the economy.
It is a survey conducted to see whether people are optimistic or pessimistic about the state of the economy and how they would conduct their spending for the future.
The idea is that if the consumer is feeling good about the state of the economy, he is more likely to go out and spend. However, if the consumer is feeling pessimistic, he is unlikely to spend. Instead, he would save, thereby compounding the retraction of the economy.
Numerous organisations conduct their own consumer confidence index, such as Lloyds Bank Consumer Confidence index; Nationwide Consumer Confidence index; Deloitte consumer tracker; Clydesdale & Yorkshire; Bank Annual Housebuyers Survey, etc.