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The property bubble, low deposits, and buying to let.

Discussion in 'Egypt property' started by rossantony, Aug 1, 2008.

  1. rossantony

    rossantony New Member

    At present in Dubai, a conference is being organised between the government and the major property builders in a bid to stop a so called speculator driven "property bubble" bursting there. It is the genuine opinion of the ruling family that property prices in Dubai are overheating, and after being a country dependent on oil, they have no wish to become a country dependent on its real estate value. In essence, they are sticking to their policy of "A diverse economy is the key to success."

    The fact is that low deposits of 10% or less tend to attract speculators who have no interest in holding onto the property long term. Since the downturn in the global economy, many speculators have been caught out, and cancellations and foreclosures are at an all time high.

    Las Vegas, in the USA for example is experiencing the highest foreclosure rate in the USA, mainly down to low deposit/high return speculation by developers.

    So my advice for today is "Beware the low deposit/high return strategy!" and "look for genuine rental guarantees!"

    Is it better to be in a market with more sensible payment plans, and less credit borrowing?

    I think so, it curbs speculation and tends to make the market prices more realistic.

    Egypt tends to fit the formula I speak of, with most developers, asking for 25 - 50% downpayment, and with no western style credit facility available, people are having to use cash or personal equity to purchase.

    Like so many bubbles, buy-to-let is already beginning to be a problem in some parts of the world.

    In the UK, an oversupply of properties and a collapse in incomes are leaving many would-be landlords with empty homes.

    But there are parts where the market is much less well developed and it's still a viable proposition.

    And with equities ever more unreliable, is buy-to-let worth a look?

    Given that you've done your research and are sure you are buying in a buoyant rental area, let's look at the possible benefits.

    The most obvious is that in return for a deposit of up to 25% of the property's value, you will end up with a "free" house.

    If your rental income covers your mortgage repayments each month, at the end of your mortgage term, you will own the house outright having paid out only your deposit.

    Any uplift in the capital value is a great bonus on top.

    Leverage

    Where property could have an advantage over other investments is the leverage - it makes your money work a lot harder.

    Suppose you put down a £10,000 deposit on a £50,000 house.

    If after a while the house is worth £75,000, you would have a £25,000 profit - that's 50%.

    But in fact that £25,000 profit means the return on your original investment of £10,000 is 250%.

    Because you are borrowing so much, any uplift is magnified.

    However, by the same token, any fall in the price would also be magnified.

    One other advantage that property has is that your bank manager would be unlikely to lend you £40,000 to go out and buy shares.

    In fact, house prices have compared favourably with shares in recent years:

    In 1984, the average house price was £32,000. Today it is £122,000.
    If you bought £32,000 of shares in 1984, they would be worth £108,000.
    Of course, those performances might not be repeated in the future.

    So the economics can stack up in the right circumstances, but there are downsides.

    Non-occupancy - Don't expect to have a full house all the time. You should write off two months when you get no income if you're carrying out repairs or between tenants.

    Rents can fall - Rents are quite low at the moment and could go down, as well as up, so make sure you know what's happening in the area where you buy.

    Interest rates could rise - They are at low levels, inflation is rising at the moment, putting a hold on any cut in rates, but if they go up, your mortgage repayments rise too.

    Tax - You'll have to pay tax on any rental profit you make and Capital Gains Tax if you sell the house, when you bring the money back into the UK.

    It ties up your money - three to five years should be a minimum investment period because of the high entry and exit costs.

    When you buy there are stamp duty, lawyers' fees and valuations; when you sell there are estate agents to pay and more lawyers' fees.

    So think hard before deciding to go for it - and above all, do your homework.
     
  2. Lsab

    Lsab New Member

    Thanks for taking the time to write that Ross, I found it very informative. It really added to my property education!
     
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