Friday, January 20, 2006

Anatole Kaletsky (Times Online) on why house prices can keep on rising

Opinion - Anatole Kaletsky Times Online: "Why are house prices rising even as the economy falters? Good question
Anatole Kaletsky

THE AVERAGE British family earned £2,000 in the first week of this month, according to the front pages of several newspapers, simply by sitting in their house. This figure was admittedly based on one volatile and not altogether reliable house-price survey. But given that £2,000 is more than four times average weekly earnings and that several of other indicators have recently been suggesting a surprisingly frisky property market in the past few months, the story of instant enrichment for homeowners raised some perennial questions about the state of modern Britain.

First, are house prices on an up-trend? Secondly, how can house prices keep rising, even in an economy with faltering growth? Thirdly, what does it mean for society if people can earn more money by sitting in their houses and watching the price rise, than by going out to work?

The first two of these questions were answered, albeit tangentially, by the Governor of the Bank of England on the very day the property windfall story appeared in the press. Mervyn King pointed out that the prices of houses and other assets were being boosted above "normal" levels by "unusually" low interest rates - but asset prices could be sharply corrected if interest rates were to rise above the rock-bottom levels now seen not only in Britain, but around the world. "

Check out the full article. Kaletsky, an economist I have a lot of time for, explains the global factors that mean house prices may go on rising.

Chris Bell


Sarah Beeny: Property investment in 2006

Property finance news - Sarah Beeny: Property investment in 2006
Tuesday, 17 Jan 2006

Sarah Beeny has an impressive CV: after setting up her own property development firm at 24 she went on to become a highly successful developer and then to host Channel 4's Property Ladder and Streets Ahead.

So she seemed the ideal person to ask whether it is still a good time to buy a property, as growth in house prices grinds to a halt. "I personally think any time is the right time to buy a home," Sarah told MyFinances. "You earn money so you can live somewhere you want to live. So I think that if it's a home, now is absolutely the right time.

It's a long term investment, the market may dip a little bit, move a little bit up, but you're going to be there for ten years so who cares, really." However, she added that now was certainly not the time to go into property investment in an attempt to make an easy profit.

In the last year and a half property prices have gone from recording annual returns of up to 20 per cent, to making a meagre three to five per cent. But while the market has slowed, the prospects of rapid falls are equally far away. "Unless interest rates change dramatically, or relatively dramatically, I don't see the market moving particularly in any direction," Sarah said. And this situation has made it difficult for investors. With house prices high, and rental yields at three to four per cent, property is no longer a simple avenue to making money.

Without rising house prices driving up capital gains, the returns are paltry. "You can get [similar returns] in the post office, and you don't have to fix the boiler, or deal with difficult tenants, or people who don't pay their rent, or fix the roof," Sarah noted. And this means the market is not as attractive as it once was, and despite the success she has experienced, property development is far from the easiest route to a profit.

"Would I start now? No, I don't think I would," Sarah said. But that is not to say there is no room to make money. She pointed out that property is still a relatively secure long-term investment: "So as long as you're not stretching yourself really thin, you're not desperately struggling to do it, it's not a bad place to put a big lump of money. "But most of the people investing at the moment are hocking themselves up to the eyeballs, and struggling to just about pay the interest on a buy-to-let, which just seems nuts to me, absolutely nuts."

However, there are still opportunities - and as any homeowner knows, property is far more than just a simple job. "In any market, in any country, there are developers who make money. So I say all of this doom and gloom, but there will always be people who make money, because people always want homes," Sarah explained. And how to make this money? "It's not so much area based, it's about the figures," she said. "If you've got a little two-up two-down with no structural problems that just needs a little bit of decoration, you're not going to get rich from it, probably. But if you have a site that's got big problems with pollution, or it's got subsidence or a complicated site that's in a difficult location, there will be more of a margin because it's bigger risk."

And for those not wanting to take on the risk? "You can make money from it if you treat it as a job," she said. "Let's say a decorator is paid £5,000 to decorate a big house, but if you decorate it yourself then it will only cost you £1,000 in paint and you make £4,000. Assuming you can sell it. "But you are earning the same amount of money as if you were going and painting someone else's house. That's the salary that a decorator would earn. You're not making the money from developing, as much as you're doing the work and not paying someone else to - so you could make that by setting up a building company."

Of course, there is another reason to be a property developer. "If you really love property, and buildings, lifestyles and how people live, that's a good reason for going into development. "Personally, I really love buildings of all sorts. So while I said I wouldn't enter the property business now, I would - because I do really love it. But I think that if it’s a get rich quick scheme then I'd go and do something else.

"I think a lot of people were under the impression that property development was a way of becoming a millionaire in six months, while doing nothing, and I don’t think that's the case. And I'm not sure it ever has been, really." Sarah Beeny can be seen on Channel 4's Property Ladder and Streets Ahead, she is also developing a new project, a dating site with a twist - "

Sarah talks a lot of sense.There's no easy money in property development for 'get rich quick' amateurs.

Chris Bell