Buy-to-let indicates market is healthy

Thu 07 Nov 2013

The metric, which shows average yields at between seven and eight per cent, suggests that properties have significant potential for price growth.

“Yields can be used to assess the health of the property market, indicating whether a boom or bust is looming," said Stuart Law, CEO of Assetz.

"The good yields that are currently being achieved show that investors bought at a good price and that prices would have to rise by almost half again to bring yields down to the pre-crash levels where investors were speculating solely on house price growth.

"Talk of a price bubble is premature whilst investments are so cashflow positive."

Just before the market hit its peak in 2007 average regional gross yields were hovering at around five per cent.

This level makes it difficult for investors to cover running costs and future interest rate hikes, meaning that buyers are speculating purely on house prices increasing.

“The more a price bubble is referred to the more investors begin to believe it and the speculation begins, indeed we are already seeing the beginning of an expectation of growth returning rather than investors being solely happy with income," Law explained.

"Right now, average yields are still offering investors healthy returns and our ‘yield-yard-stick’ indicates we are far from a market collapse.”

The danger of overzealous optimism is still a factor, with some commentators warning that a bubble is inevitable.

However others say that the truest indicator of a healthy market is transaction data and anything that encourages people to sell will be good news.

"Ironically the very scheme people are putting into headlines as likely to aggravate the perceived problem, Help to Buy, might just be the one that solves it if those wondering about selling think that perhaps now might be the time to sell," said property expert Ed Mead of Douglas & Gordon estate agents.

"One of the oddest property related human conditions seems to be that most people will wait for a rising market to sell."

Source; Zoopla

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