Property Investment at Different Ages
For many decades, residential property investment has proven itself to be a generally reliable means of generating and safeguarding wealth. Average values have risen markedly, and for most investors, this capital growth has typically been supplemented by regular monthly rental incomes. Taken together as a long-term average, these returns have delivered appreciable rewards. There’s a common myth that the value of residential property doubles every ten years. In reality, returns are less predictable than that and their patterns substantially more complex. It’s probably much fairer to say that the biggest gains come in cycles, though not necessarily in regular cycles. Gains differ from year to year, often following a rough parallel to average earnings and, in some periods, average values can actually fall. Over the longer-term, however, the general trend has been unmistakeably upward. The average cost of a house in 1970 was £3,920 according to Land Registry data, and by 1990 the average was £58,250. Another 20 years later, the mean figure had risen to £167,469 and, by 2020, it had reached £231,940.
Averaging out the annual variations, capital returns have greatly outpaced the rate of inflation. Since the start of the 21st century, despite the global financial crisis and other challenges, average house prices in the UK have more than trebled. Over the same period, the UK rate of inflation (as measured by the Consumer Price Index) had remained at well under 5% every year until this year, averaging almost exactly 2.0% per annum. This reassuringly strong price trend usually prompts investment market commentators to remark that property investment is ‘best regarded as a long-term venture.’ In most respects, this is true, but it ignores the fact that, depending on their age and circumstances, different investors will inevitably be working to different budgets, objectives, constraints and timescales. In this brochure, we will therefore consider how investment priorities, criteria and approaches might change according to the individual’s age and financial goals.
Property and Younger Investors In the last couple of decades, the UK has become more of a ‘gig’ economy. Younger people tend to be more mobile than preceding generations and more willing to take on different or multiple jobs. The conventional ‘nine to five’ is not a reality that thousands of young workers would recognise, and nor is the prospect of a lifelong career with a single employer. Faced with dwindling career security and the emergence of new job roles that hadn’t even existed for previous generations, many younger people have needed to stay flexible and, adopting an entrepreneurial mindset, they have looked to build incomes however and wherever they can. Growing up in a decade that has seen strong house price growth but an unprecedented stagnation in real incomes, young people will be more aware than most of the opportunities that property investment affords. That might be one reason why the average age of UK property investors seems to have been falling steadily. In 2018, the rental property website YieldIt published figures suggesting that the average age of a buy-to-let purchaser had fallen to 42, a drop of 10 years from the average in 2014. More recently, in May 2021, another poll found that the average had fallen still further, with 47% of all landlords aged 40 or younger. The trend is understandable. Young first-time investors have seen more experienced landlords make some excellent returns in recent years and, for much of that time, borrowing costs have been exceptionally low. True, the base rate is now creeping upward, but it has done so against a background of record-breaking price growth and exceptional demand on the part of both buyers and tenants.
Although history is no guarantee of future performance, younger investors certainly have good grounds for confidence. The fundamentals of the market are still stacked very firmly in their favour. Housing supply is extraordinarily restricted, while demand is close to an all-time high. The pandemic, which had originally been tipped to prompt a sharp decline in the property market, instead forced people to reappraise their domestic living arrangements and precipitated a surge in both market activity and price growth. In short, the property market has shown remarkable resilience, and – given the continuing imbalance between supply and demand – there are good reasons to expect this resilience to persist. What’s more, this sense of security is boosted by a very solid record of long-term growth. At a time when the economy is otherwise volatile, employment is often insecure, and when high street savings accounts are producing dire rates of return, it’s easy to see why property looks like such a promising alternative.
In March 2022, HM Land Registry published its House Price Index for January and it showed that over the last year, the average residential property had gained +£24,072 in value. In 2021, that represented over 75% of the average earnings (£31,285) of a full time UK employee. A more recent comparison in Halifax’s March 2022 house price index (published 7 April) is starker still. In the 12 months to March 2022, it notes that house prices rose by +£28,113, “not far off average UK earnings over the same period (£28,860).” It’s true that 2020 and 2021 were unusually rewarding years for property investors but, nevertheless, such figures show why investment is so attractive to young people. So long as they can secure the initial finance, it’s an option that can deliver a substantial boost to their long-term wealth while also delivering a steady monthly return. Property can produce a good supplementary passive income and build value for the future but, for young and ambitious investors, it is also a career option in its own right. The UK is seeing rising numbers of young investors who are building their portfolios and helping others to do the same. In 2021, research by One Poll found that younger landlords tend to be the most optimistic about the future. 54% of respondents aged under 30 said they were ‘very confident’ about the next 12 months, and 47% of them were planning to buy another property within the next year.
Property and Family Investors Many of the features that make property such an attractive asset class to younger people will also apply to families and those approaching middle age. Often, those aged 30+ will be developing their careers, earning better salaries and building their savings. As these savings mount, an obvious question arises namely: “is my money working hard enough?”
For most people in Britain today, the honest answer to that is a resounding “no.” Money in savings accounts is essentially losing value every day, simply because the interest that the banks and building societies pay out on them falls well below the rate of inflation. Over time, while high inflation persists, savings shrink.
Options for Savings Millions of ordinary people find them themselves watching their hard-earned money lose value. Some will stick doggedly to fixed rate bonds and savings accounts for the sake of security – that is, knowing that their money is not at any risk and that at least its full face-value will be returned to them eventually; albeit it will be worth less when they withdraw it. A popular alternative is some form of stock market investment, perhaps through a tax-efficient vehicle such as an ISA. This has the benefit of delivering better returns, sometimes well over the rate of inflation, but better returns normally demand higher risks. That’s a particular concern at a time like the present, when economies are struggling, international tensions are high, inflation is rampant and markets are jittery. Fortunes can be won or lost and, for many, that’s just too much of a gamble. When weighed against such alternatives, property will appeal to many people. Fundamentally, the UK residential market is strong and, as we’ve already discussed, it has a very well proven track record. There’s no escaping the fact that demand in the UK is immensely high and yet supply is severely limited. In most circumstances, that’s a reliable formula for rising values. It also makes property a more practicable option for slightly older people and couples, who may find it easier to scrape together a deposit for that first buy-to-let mortgage.
Investing for Family Another motivation for property investment arises when children reach university age. Then, parents with sufficient savings can invest in a suitable residential property and achieve two goals at once: provide for their child during their education whilst also building an investment that will continue to generate returns, either for the parent(s) or for other family members. For many parents, buying a student property and having their child as one of the first tenants represents a crucial first step into the field of buy-to-let investment.
Property and Inheritance There are clearly good reasons why individuals might make an active choice to become a property investor. However, from their thirties onwards, many people will also be approaching a time when they might become ‘accidental landlords.’ Often, this will happen as a result of inheritance, or if an elderly, potentially vulnerable relative decides to leave their house, either to live with family or to move to some other more suitable accommodation. In such cases, if they aren’t immediately forced to sell, people often find themselves becoming first-time landlords and beginning to see the financial rewards: the regular monthly rental payments and ongoing gains in capital value. Such landlords might not have the time or the experience to manage the property themselves but, by appointing a rental management company, it’s often possible to take a low-stress ‘arm’s length’ approach. The agency takes care of routine concerns such as tenant-finding, maintenance, bills and rental payments, leaving the owner free to enjoy the profits and the capital growth. This can be a pivotal experience for some people. At a time in life when many families will be saving and planning for the future, it becomes apparent that being a property investor can potentially make a big contribution to longer-term financial security. There are, of course, other reasons why people become accidental landlords. Examples include being unable to sell a property – and thus renting out the unsold property to keep the bills paid – or, if two people form a cohabiting couple, one of them may choose to let out their former home. In either case, the benefits can quickly become obvious and lead the owners to consider expanding their portfolios.
Property for Older Investors Some people will start planning for their retirement from their very first day of work. However, the subject seems to become ever-more important with age. From middle-age onward, individuals will typically pay more attention to the value of their pension pots, to changing retirement ages, to the precise terms of their pension entitlements and to what many media refer to as “a national pensions time bomb.” Slow or zero growth in average earnings, several sharp economic shocks and an ageing UK demographic are all forces that are conspiring to erode the average value of pensions. So too is inflation, which has recently returned to prominence. In 2019, Aviva warned that 9 million Britons were “sleepwalking into a pensions crisis” and failing to accrue enough value to support themselves in later life. Since 2019, a host of factors have impacted on the UK economy. The Covid pandemic, staff shortages, new constraints on international trade and rising energy costs have all hurt the country’s recovery, which has been substantially weaker than those of the other G7 economies. Discussing GDP and international trade, the government’s Office for Budget Responsibility writes that: “By the fourth quarter of 2021 total advanced economy trade volumes had rebounded to 3 per cent above their pre-pandemic levels while UK exports remain around 12 per cent below… The UK therefore appears to have become a less trade-intensive economy, with trade as a share of GDP falling 12 per cent since 2019, two and a half times more than in any other G7 country.” Since a proportion of UK-managed pension funds are typically invested in British businesses, the growth (or otherwise) of the UK economy must have an effect on total pension values over time. Many other factors will also come into play, of course, but at a time when international market conditions are anything but favourable, ordinary people will inevitably be anxious about what their annuities will eventually be worth. For those who do the sums and discover a shortfall between reality and aspiration, investing a proportion of their savings may afford a solution. Using the returns on property investment to supplement pension incomes can be an attractive choice for older people. First, older people may have more savings to invest, or they may be thinking about downsizing, releasing equity and using the funds to purchase a small buy-to-let. Thus, they may face fewer obstacles to ownership in the first place, and they may be better able to buy outright and therefore face less exposure to the risk of rising mortgage interest rates.
Next, property generally delivers a welcome monthly income to supplement pension payments, so older investors may be able to enjoy a better standard of living with more disposable income than, say, people of the same age who may live in larger homes but have to get by on a relatively small monthly budget. Another important benefit is that a rental property can be passed on to family members as an inherited working asset. Alternatively, elements of a property portfolio can be gifted to family members when the owner is still alive. However, there are tax implications associated with all such options, so to minimise family members’ tax liabilities, these are certainly questions best considered with the support of a properly qualified and regulated independent financial adviser.
Age, Borrowing and Leverage A final point on the subject of age and investment concerns the times when borrowing might appear to be the most sensible and attractive option. Younger investors typically have fewer savings and less value in any existing capital assets. This makes it much harder – often impossible – to buy outright, so borrowing is usually essential. Fortunately, there are certain economic conditions, such as those prevailing now, when making a buy-to-let purchase with borrowed money makes good financial sense.
During times of high inflation, the real value of the money repaid on a buy-to-let mortgage will tend to go down over time. However, the real value of the asset purchased (i.e. the property) should continue to rise over that same period, so the borrower gains a clear advantage. In real terms, the property should ultimately be worth considerably more than the money that has been repaid to the lender. A further benefit – the concept of leverage on borrowed funds – can be enjoyed whenever property values rise. We can illustrate this with a hypothetical example. Leverage – an Example: • • • • •
Property price: £250,000 Investor's deposit: £50,000 BTL mortgage: £200,000 Annual capital appreciation: +5% (i.e. +£12,500) New value after one year: £262,500
Here, the investor sees £12,500 of capital appreciation, despite only contributing £50,000 as a deposit. (The rest of the purchase price is borrowed.) That equates to a gross return of 25%. If the investor had bought the property outright, then the gross return would have been only 5%. In other words, borrowing has delivered a five-fold improvement on total capital returns. The investor’s own money is being made to work much harder. Logically, then, borrowing and the concept of leverage tend to work well for younger investors who will have years to pay off a mortgage and who may well want to retain plenty of financial liquidity in order to fund additional property acquisitions. (After all, using the example above, an investor with a budget of £250,000 could conceivably buy one property outright or up to five similar properties via BTL mortgaging.) For those with ambitions to build a growing portfolio, borrowing can therefore be a rewarding long-term option.
There are risks, of course. These include the possibility of developing negative equity if house prices were ever to fall sharply, but such risks begin to dissipate as and when property values return to growth. History suggests that longer-term market trends tend to insulate those who commit to many years of continued investment because average house price gains have ultimately outweighed any occasional falls. For older people, however, the situation may be very different. First, they may have no wish to take on new debt in later life. Second, BTL mortgages often stipulate a maximum age – i.e. the age the applicant will be at the end of the mortgage term. Some older investors may therefore be precluded from borrowing altogether. Third, many older people may have no aspirations to continue building a portfolio, so matters of liquidity will be much less important. And finally, of course, the investor’s priorities might start to shift towards issues of inheritance, tax calculations and generally making life easier for their families. For all these reasons, ownership rather than borrowing might appear to be the more attractive choice.
Summary Although this article touches upon some of the most common issues that investors consider at different ages, it’s very important to recognise that this is no more than a broad overview. The UK property market produces very different results for investors according to a large number of variables. Examples of those variables include location, property type, condition, target market, local economic factors and many others. Any investment should only ever be made as a result of detailed research into the marketability and suitability of the specific property in question. Whatever your age and sector experience, it’s essential to take advantage of accurate and up to date research. *** To find out more about investment opportunities throughout the UK, please call our advisory team on 01244 343 355.