A day in the property market

Yesterday, I focused my mind on the property market. Situations came my way, which gave me a good insight into the current market.

On a walk down my street I saw a property on which a developer created 5 flats out of one house. Miraculously, he sold 3 of them this year (in 2009)! I could not believe anybody was stupid enough to buy at this time. The sales were 2 1br flats for 170k each, and a 2br flat for 225k. Anyway, 2 of the flats remained unsold. One is now up for auction, obviously because the developer could not find anyone else to buy! This means that if the buyers of the other flats had waited, they too could have enjoyed a significant price reduction. I'm going to follow the results of that auction, so I put a note in my calendar to see what the remaining flat goes for. It will be a great lesson to compare the difference in the selling price, and the impatient buyers of the other flats will suffer a great regret and learn a good financial lesson about patience, for the future. I discovered that many auctioneers allow auctions to be viewed live at EIG online property auctions.

I saw a few former new development properties in my road still vacant, with "To Let" signs outside. In the window of a local estate agents I saw flats for let, with the offer of the first months rent free! Clearly the housing market is not looking good. Prices and rents are dropping.

I ran into an old friend yesterday, who formerly lived in a council house and was on benefits, but has now purchased his own house outright, in cash. He was given the opportunity to purchase the council house from the council for just 16k in the year 2000. He sold in 2007 at the height of the market for 225k! He then moved to a cheaper area and is now living mortgage free, having purchased his new house outright. He was beaming proudly from ear to ear, and boasting of his success. It was clear proof that money does make you happy, as I have never seen him happier. It also shows how the right opportunity can make a big difference in someones finances. He was basically given almost a quarter of a million pounds by the government. Amazing. The lesson here is that home ownership gives you a significant financial advantage, whether you are managing, developing, or living in it. Another lesson is that the government/council are stupid to give away housing so cheaply.

I visited my millionaire mentor Mr Piper and helped with his moving into his new home. He paid 300k cash, for a property which sits on land which would be worth well over 800k if it was in London. He has never been to college or university, yet has created a property empire worth over £4m. He is always taking action on something, he has many renovation jobs for his new property on the go at the same time. When I asked him how he got so much done, he said "sometimes I think I'm not doing enough. I always make sure I do something every day". Of his new home, he said "people who I show this place to say I must be lucky to afford a place like this, but there's nothing lucky about it, it's called work". Mr Piper thinks that we are out of recession and said that the world of finance now moves so quickly that recessions will be over in a fraction of what they once were. I disagree, and I think bank lending will be significantly lower than in previous years. The government and banks won't want to create another economic catastrophe so quickly after the last one.

Property is a strange thing. Only a few people will get lucky, like the man who was given a house by the government and now lives mortgage free. A more reliable and dependable way is to work for it, like Mr Piper did. I think the property market has not yet bottomed out, as house prices are still too high for average wage earners, and banks have stopped handing out ridiculous mortgages. House prices will probably go down to around 6x normal income, for a couple, with borrowers expected to find the extra money for deposit from elsewhere, such as savings, parents, loans etc. A house will remain the most expensive investment most people will ever make. Committed people will find the extra money from somewhere. They will have to, as few unforced house sellers are going to give their property away for a low price, except the government. The housing market will remain unaffordable for many.

In the recent book "How to be smart with your money" Duncan Bannatyne recommends owning your own home. In spite of all its trials and tribulations, if you can afford to get onto the property ladder, you should, but you do not have to do so right now. Martin Lewis has a great article on his website about being cautious about investing in property.

I think the current property market has room to drop some more. I'm going to wait for a few months before investing further (probably another year), and when I do invest, it will be in the period of November to February when the property market is cold and there is less competition from other buyers.