The property market will crash (I think)

We have been trying to buy a flat for months and many months ago (August 2019) agreed on the purchase with the seller. It’s taken a long time to sort out some legal paperwork on the seller’s (the estate agent loves the word “vendor”) side of things. A few weeks ago, we got word from our solicitor that he has now finally received all the paperwork he needs to continue with the purchase.

However, Covid-19 happened and he asked us if we were still planning on to continue with it. At first, we thought that this is fantastic news and we should buy the place. After some thought, we got more cautious as the UK economy is headed into a massive recession, no-deal Brexit is more real than ever before and my employment isn’t that secure.

Yes, we’re lucky that both of us can continue to work from home but I can see business drying up in the coming months (although summer is always a bit slow). My girlfriend doesn’t worry as her job (in mobile gaming) is going well and her employer is making record sales as more people are at home and have time on their hands.

We decided that we should renegotiate the price on the flat and offered to buy the flat at a 5% lower price. The estate agent replied a week later and declined our offer as property only goes up in value (paraphrased and read between the lines a little). This was disappointing news and we decided to pull out.

Luckily it’s only £250, which we lost out on, which were some legal fees we incurred early on in the process.

I’m a bit of a crashist when it comes to the property market. We have 7.5 million people on furlough as of 10th May 2020. Most of them are earning less now (80% of salary up to £2,500 gross p.m. where the employer could voluntarily top-up to 100% of salary), which means there’s less demand to buy properties. Similarly, I predict, quite many of today’s furloughed staff will have no job to go back to in a couple of months’ time.

Unemployment is at 4% as at Feb 2020 but this is expected to double once we have the numbers available. This is not good for property prices.

Millions of people have requested mortgage holidays. A lot of people here are already unable to pay their mortgage, what’s going to happen in a few months’ time when the furlough ends? There will be defaults and people will lose their homes.

The estate agents such as Knight Frank and Savills etc have come out with predictions of 3% or 5% falls for the year, which will rebound in 2021 – what a joke. They have a vested interest in saying that things are all good and we should all be buying property left, right and centre. The fall in property prices will be significantly more than just single digits. This crisis is going to be huge as big parts of the economy are shut down.

How do you imagine the airlines go back to normal? The tube with wings where everybody breathes the same air is impossible to make safe for travellers. How do you do social distancing on a plane without big increases to ticket prices? I like many would be unable to fly to, say Spain, for a holiday if a condition of entry to the country was for me to self-isolate for 2 weeks on arrival. The travel industry will be in a new world of pain.

London has many AirBnb’s as well. Guess what, they’re empty because nobody can travel. That’s not going to change for a while. I expect these chaps will flood the market with either long-term rental properties or try to sell and get out of this business. We shall see. This is good news for lower rents and lower property prices.

What about a vaccine? Well, mostly the fact that it doesn’t exist. Even if it did, it would take many months to produce it and distribute it all over the world for everyone to feel safe again. I’m not saying they won’t find a vaccine or develop a cure, I’m saying it will take time, during which the economy will suffer.

OK, back to property prices. Some of the highest earners are in the tech sector – programmers and what not. They can work from home and many (e.g. Twitter) companies have already said they are happy for all their staff to continue working from home even after the plague. This has increased demand for homes outside of cities. Why would somebody on a six-figure salary pay £3,000 on rent in a Central London flat, if they could own a nice home outside the city? I expect a lot of high-earners to relocate further outside big cities where their money buys more happiness. This will drive prices down in big cities but increase them in smaller towns.

My friend asked me how long do I want to defer buying and paying rent for nothing. If I buy now, I’d still be building equity and have an asset. The problem here is that I’m not looking to buy a forever home. I’m not sure I will be in London long term. Therefore, buying now and selling within a couple of years may be very expensive if property prices crash. I could, of course, rent the property to tenants when I move elsewhere but that’s not something I want to do – I don’t have an overwhelming desire to be a landlord and deal with fixing boilers, washing machines and water leaks. It would also be difficult to re-mortgage a few years down the road if I was in negative equity and there’s a risk I’d end up paying more in interest.

Why take all the above risks? The only way I’d take these risks is if the upside was proportional to them. I’d be happy to buy if I got a price 20%+ cheaper than the prices in the pre-Covid-19 world i.e. in Feb 2020. I think it’s a bad idea to go ahead with a property deal agreed in the pre-Covid-19 world now that we are in the post-Covid-19 world. You should only consider doing that if you are buying something for the long term.

My plan is now to sit tight and adopt a wait-and-see approach. We also decided to move to a cheaper rental flat as living so centrally doesn’t have the benefits it used to have (everything is closed – cafes, restaurants etc, walking distance to work isn’t that attractive as we work from home). We are paying too much for the luxury of living in Covent Garden in Lockdown London.

My employer has also said that they will take a much more cautious approach to get back to normal compared to any Government guidance as a big part of our clients are elderly and more likely to suffer health problems from Covid-19 infections. My girlfriend was told that they expect most of staff in her company to work from home until at least September 2020.

Taking all of the above into account, I think we have made the right decision by not buying the flat. I will keep you updated once this changes. In the meantime, we will continue to squirrel away money for an even bigger deposit.

Take care!

Happy new tax year 2020/21

Today is the first day of the 2020/21 tax year. I’m able to fund my ISA and LISA again as last year I managed to max out both of them.

So, this morning I topped up my LISA with £4,000 and invested it. I expect to receive the £1,000 LISA bonus payment around the end of May and will invest that once received.

Going forward, I will make regular monthly contributions into my ISA (remaining allowance of £16,000 as I just funded my LISA) and at some point when the markets are less volatile will use my GIA to fund the ISA as well.

I asked my ISA provider if it was possible to fund my ISA from the GIA with an in-specie transfer i.e. transferring the assets in the GIA into the ISA without having to sell them to cash beforehand. This would have avoided any potential issues with being out of the market, but unfortunately it’s not possible with my provider (not sure if any other provider would allow this). It was worth a shot anyway. Therefore, I’ll wait for things to calm down a bit.

I realize my remaining cash (or emergency fund) is now around £5,000, which means it covers about 3 months’ worth of my expenditure. I think I will prioritize adding money to my portfolio rather than increasing the cash level in the coming months as I believe markets present a good risk-reward ratio right now. So buy buy buy!

You might remember that I was planning on buying a flat with my girlfriend but the pandemic is making this more complicated. We have already agreed to buy a flat but there’s some kind of issue with the transfer of the leasehold, which has taken up at least 6 months already. Our mortgage offer will expire next month and I have a feeling banks will make it much harder to get a mortgage as they are likely to increase their deposit requirements. So, we might not be able to get another mortgage offer for quite some time. It’s not looking good and we’ve been thinking that property prices could come down as well… So we might be better off buying a bit later.

Enjoy the sunshine!

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LISAs for first time buyers

I started thinking about buying a flat about a year ago in the beginning of 2019. Previously it seemed impossible and I simply accepted that I will always be renting.

However, my situation had changed. I wasn’t renting a room in a flatshare anymore. Instead, I had a blissful year of living together with my girlfriend (Pikachu) behind me.

After looking at our savings/investments, combined earnings and property listings online, we found out that we could actually buy something not too long down the road.

Currently we live in a Central London studio apartment paying £1,442 pcm in rent and it seemed that if we played our cards right we could end up reducing our living costs after buying a new home. This calculation took into account increased transportation costs, mortgage and service charges.

The decision to buy something was made. Now, we needed to save up for the mortgage deposit.

I had heard about Lifetime ISAs (LISAs) and remembered an article from Martin Lewis which said these were a no-brainer for first time buyers.

A LISA is essentially a savings plan with several bells and whistles. You can save up to £4,000 each tax year and will get a top up of 25% on your contributions each tax year (i.e. up to £1,000). Therefore, both of us opened LISAs with £4,000 each in February 2019 and got the full £1,000 bonus in 4-8 weeks’ time. Therefore, we had £10,000 in LISAs in 2018/19. I must caveat that my LISA was a Stocks & Shares LISA and the actual value fluctuates with the markets. Pikachu’s LISA was a cash LISA.

There are some criteria to open LISAs and restrictions to how and then you can make withdrawals. To begin with you need to be below 40 years of age to open the account. You can use the LISA pot to buy a home if you are a first time buyer (people who have inherited or have been left property in trusts don’t qualify), the new home must be priced at less than £450,000 and must be bought with a mortgage. You can make tax-free withdrawals after age 60 but if withdrawals are made earlier for any purpose other than first time property purchase you need to pay a 25% penalty on the withdrawn amount. Lastly, the account needs to be open for a calendar year before you can use it towards your home purchase.

That last point is important. If you have already found something and are already in the process of buying then opening a LISA to get an extra grand isn’t going to work. You need to open the account now to start the clock. Therefore, I’d encourage everyone who plans to buy their first home to open the account now with a small deposit – say £1 or £10. You can add more later when you are more serious about buying. This will set you up to benefit from the LISAs and will most likely make you a few thousand pounds.

Back to my story. April 6th and therefore the new 2019/20 tax year came around quickly and I added another £4,000 into my LISA. Pikachu did not contribute at that time as she wasn’t convinced about us making it to the 1 year LISA anniversary (however it was palatable to suffer the exit penalty on the first £4,000 she contributed). She thought we’d find something sooner and didn’t want to pay the 25% penalty.

I however took the risk as my friends and colleagues told me that buying in London can take many months. We agreed if we get close to the 1 year LISA anniversary and have not bought yet, then Pikachu will add another £4,000 into her LISA. That ended up being exactly what we did.

We found a property in August, agreed to buy it and appointed layers etc. However, things are taking ages and at the end of January 2020 it seems we are no closer to a completion date than we were in August 2019.

If you have done the maths, we have now received 4 lots of £1,000 bonuses with the LISAs and “made” £4,000 so far. If things with our property purchase drag on, then we will probably get another 2 bonuses in April/May 2020.

Anyway, it’s been a good idea to use LISAs and you should too if you’re in a similar position to us.