For those of us that have been around long enough to participate and see the property market cycle in action in different areas in the UK will think nothing of this.
However, a recent conversation with a new client made me think to share this content.
Client: ‘I've been on your database now for over 6 years and due to my personal situation have not really done anything just been watching until now.
I do remember though you launching an off-plan development a while back with 1 beds for about £200,000 and within a year or so, in the same development like for like units were going for over £300,000. How can a developer justify increasing their prices by over £100,000 in such a short period of time?'
Whilst we can debate factors of demand and supply that lead to such price increase within the galloping stage of the property market cycle.
At the appropriate time within the market cycle here is a simple way of understanding from the eyes of a developer how a £100,000 price increase can be justified.
In the eyes of a developer, an owner-occupier buying the 1 bed for £300,000 compared to £200,000 would only need to find £10,000 extra deposit (based on 90% loan to value) and extra £1,500 stamp duty. So in total £11,500 in order to purchase this property at the new price.
From the owner occupier's perspective if this is a city centre property it would make sense to buy as long as they have the deposit to put down because a property like this if rented could cost £1,200 – £1,400/month, however by buying even based on 4% interest rate (even though currently you can get residential mortgages for 2%), the repayment on the mortgage monthly would only be about £1,195/month on a 35 year term and £1425/month on a 25 year term.
In the eyes of a developer, an investor buying the 1 bed above for £300,000 compared to £200,000 would only need to find £25,000 extra deposit (based on 75% loan to value) and extra £6,500 in stamp duty. So in total £31,500 in order to purchase this property at the new price (assuming, of course, rents stacks up).
This is because the property is bought with leverage and £100,000 price increase is affordable (certainly not by everyone) but certainly by working professionals when you break it down to it's minuscule.
From the developer's perspective they know that if they do not incrementally (and sometimes very sharply) increase prices when the market allows them to do so, they will get bitten in the ass down the line because if they intend to stay in business long term, they know they'll have to go buy more land, pay more contractors e.t.c and guess what, the cost of land is going up as the limited land we have gets used up so the developer has to increase their prices!
An interesting perspective to have if you are an investor looking to use off-plan as a strategy for achieving growth within your portfolio.
As an investors it's always good to look through things not only from your perspective but also through the lens of a developer (in facts look through the eyes of all the participants within the marketplace), because by doing so you develop a vision that allows you to see beyond the now as this sort of opportunities only comes to those who have the foresight to position themselves well in key locations (In, or easy commute to business hubs) with key developers to capture such price increases before they happen.
Then a few years later as opposed to being like my new client who was watching things happen for years, you can look back and be one of the ones who benefit from this happening.
It's just the way the system works. You get to choose whether to benefit from it or not. Feel free to contact the team at Gladfish today.