So when will house prices crash? Not a week goes by without some doom-monger predicting a catastrophic fall in house prices, with some predicting that interest rates of 8 per cent are needed to stem the continual rise in house prices.
I always find it fascinating how many of these self-appointed experts who seem to constantly make the headlines have never owned an investment property or even their own home, but feel it is necessary to put the fear of god into those that do.
A forgotten point
While property prices continue to rise due to the high demand and chronic shortage of supply, there is one fundamental point that many have forgotten: how much does it cost to build a house or apartment? Will the price of raw materials drop, will labour costs plummet and transport costs halve?
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I don’t think so. Skilled labour is in such short supply – you only have to ring a builder to establish how full their book is, transport taxes continually rise and raw materials are scarce.
At a bare minimum, the build cost of a five storey apartment block is circa £130 per square foot with taller developments nearly doubling this. The average two-bedroom apartment is approximately 750 square feet, so it will cost a minimum of £97,500 to build one. That is just the build cost and does not take into account the purchase of the land that it is built on.
The average cost of urban building land is usually a third of the gross value of the development, so this takes the total cost up to £142,500. You then have to add on the profit margin for the developer – circa 20 per cent – and you are left with a figure of £171,000. Naturally there will be some variation based upon the location and quality of the build, but in essence this figure is the minimum value of the core asset.
Considering that the government is now looking at ways to make homes more efficient I see this base cost rising even higher. When has green and efficient meant lower cost? Solar panels may well reduce the running costs of a property, but think of the increased work and installation needed which will be added to the bottom line. Fuel efficient cars cost more and so will ‘green’ houses.
catch up on the industry buzz
With the introduction of Home Information Packs, the compulsory Energy Performance Certificate will put pressure on builders to ensure houses are A-rated. I can just hear it now – ‘the property might be slightly more expensive, Sir, but think of the savings made in running costs’. Could this become the UK’s estate agents’ new mantra?
Intrinsic value
Most affordable housing is not overvalued; it has an intrinsic value in bricks, mortar, the land it is built on and the cost to build. New property is never going to cost less than all these parts added together and therefore second-hand property will follow suit. So it could be argued if you or your landlords are buying property below £171,000 then they have a bargain and eventually these assets will achieve parity with the equivalent new build.
With global warming come fears over flood plains and the UK diminishing in size as the sea reclaims the land. If you have not noticed, we live on an island that is becoming ever more congested. Unless the government decides to start building a palm off Brighton beach, there is only a finite amount of land available.
With natural resources diminishing, we will need to find ways to heat homes with fuel sources that leave no carbon footprint. One of the only fuels that leaves no footprint is rape seed oil, so don’t be surprised if agricultural land starts to rise in price as vast areas are allocated to start growing this resource.
Vast banks of wind turbines will also eat into available land, to power the houses that need the energy. So with erosion and the need for alternative energy, how much will be left to build on? The pressure on quality building land will only increase along with the cost of acquisition. So what does this all mean for buy-to-let?
The buy-to-let effect
Buy-to-let is driven by demand and the confidence of the investor that the asset will be rented and that over the medium term it will rise in value. According to a recent ‘Changing UK Housing Market’ report commissioned by Alliance and Leicester, the buy-to-let market will grow by 40 per cent in the next decade.
With the continued increase in demand, the younger generation preferring to rent as it becomes more socially acceptable, and house prices continuing to rise due to lack of supply, I have no reason to doubt this forecast. So get into the buy-to-let market or, perhaps, move into energy conservation. Both are rapidly growing industries.
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