Hello Readers,

Around this time of the month, I’d usually be giving my lettings update at the Property Success Network, however as we’re taking a break for the festive season I thought I would pause and reflect on just what a year we’ve had.

We’ve had the war in Ukraine, COVID-19 recovery, Governmental chaos and (arguably) Brexit throwing the UK economy into chaos. We’ve seen record Bank of England base rate rises leading record mortgage rate increases causing a huge downturn in demand, multiple headlines about house prices dropping, energy prices soaring and general inflation at an eye watering level.

In addition to the economy, don’t forget the re-introduction of cuts to stamp duty and introduction of the levelling up paper with multiple rental reforms being proposed.

Wow… what a year. I can’t believe the amount that’s happened and the issues we’ve encountered. However, us property investors are a resilient bunch – we will certainly pull through stronger and wiser.

In my next article, I will be taking time to cover off my predictions for 2023 (and what a year that will be!), but whilst pulling together my thoughts, it crossed my mind to pause and look at why we choose to invest in property.

Why do we invest in property anyhow?

Ok, so providing quality housing is one factor but as with any business, generating a return on your investment is the main reason why we choose to put our money in bricks and mortar.

I must confess, the phrase ‘profit and the private rental market’ can be a challenging topic, but as with any business providing a vital service (be it food, utilities, broadband and even clothing), profit must be there to make it attractive.

Why not put our money into a pension or even stocks and shares? Don’t hear what I’m not saying as these are key for a diverse, balanced investment strategy but as hard as it has ever been to make money in property and that we’re staring headlines about the housing market ‘crashing’ in the face, I thought I’d run some figures that make fascinating reading.

How returns from property compares to a pension

I’ll preface these figures with a crucial note that I’m just going to look at appreciation and rental returns compared to pension savings. I think you’ll find the figures using Land Registry Data extremely interesting!

Starting with average house prices, you’ll see how the past 30 years has seen a 421% increase in UK Property values:

• Average Medway house price in September 1992 – £47,218
• Average Medway house price in September 2022 – £303,391

Getting into the numbers, let’s assume you purchased a property in 1992 with a 25% deposit of £11,804. That would mean over the past three decades, your deposit would have grown in value by £256,173.

One of the main differences between property and a pension is obviously that with property, funds are locked up in an asset. The two options to release the equity are either by selling or remortgaging and it’s important to consider this for the purposes of this comparison.

Following on from the above, if we assume you chose to release funds by remortgaging to 75% LTV, a total of £227,543 cash could be released, with £75,847 left in the property including the original deposit.

We’re nearly there… it’s important to think about tax to level the playing field. I’m assuming that this calculation is based on a limited company which would attract 19% Corporation Tax. This brings the total company profit after tax to £184,310 (yes, I know the calculation is crude as Corporation Tax is changing and funds could be re-invested!)

At a very basic level, if we compare that to the deposit of £11,804 invested in a private pension, growing at an average of 7% per year over the same 30-year period, your investment would have grown in value by £84,003.

This is quite a remarkable comparison, and it doesn’t even take into account the profit from rental income which, at roughly £250 per month, equates to £90,000 less 19% Corporation Tax, giving £72,900 after tax and brings the total available funds through property to £257,210 over a 30-year period.

A remarkable comparison

Having never run these numbers in detail before, even I was quite surprised to see the difference:

• £11,804 invested in a private pension over 30 years grows in value by £84,003
• £11,804 invested in Medway property over 30 years generates ‘available funds’ of £257,210

With property, remember that there is still money left in the deal meaning the actual return should you sell is even greater and that the most tax efficient way to use the funds generated through property is to keep re-investing – this will only increase the returns you can achieve.

Needless to say, this is an extremely strong illustration that helps keep us in check as we experience something of a house price (and mortgage rate) correction.

Buying property to hold is by no means a way to make a quick buck. It needs to be considered across multiple decades, over which it’s proven to be a solid asset class.

I’d be interested to hear what you think about this comparison. It’s by no means floorless, but certainly gives food for thought as an excellent conversation starter!

Hasan