ASK517: Are house prices silently crashing? PLUS: How do I avoid a disaster?

0:02Rob B:Hi, I'm Rob. And I'm Rob. And this is Ask Rob and Rob. Hey everyone, welcome to Ask Rob and Rob, the show where you give us your wonderful questions and we give you what we hope are some wonderful answers in return. It is super simple for you to submit your question, whether it be for this show or the Sunday Times. Rob, would you like to explain once again what that easy process is?

0:22Rob D:Surely everyone knows by now, but just in case, it's propertyhub.net slash ask. If you can find your way to that webpage, then you can leave us a written question for our Sunday Times column, see yourself in the paper, your mum would be very proud. Or you can leave us a voicemail, which is actually our preferred option, because then we get to play your lovely voice on the show. Okay, let's hear our first question. This one is from Jamie.

0:42Rob B:Hi, Rob and Rob. My name is Jamie and I have a question. In the UK, nominal house prices recently rose around 2-3%. In the same period, inflation has been higher, meaning house prices have fallen in real terms when adjusted for inflation. Currently, the debt to GDP ratio has never been higher since World War II and could go higher. While the principle of the debt is continually rolled over in the form of issuing new gilts, interest must be paid. Is it therefore likely that policymakers will prefer a higher rate of inflation to help stabilise and reduce the debt ratio, given debt depends on the relationship between GDP growth and the interest rate.

1:23Rob B:And if inflation is allowed to grow while mortgage affordability remains difficult, could we see a prolonged period in which house prices stagnate but rather fall in real terms after adjusting for inflation? Finally, with the rental reforms approaching and first-time buyers facing leverage limits, could we see a property market adjustment or price correction? Or am I just being speculative? To note, the average house is currently 7.1 times the average salary, which obviously affects first-time buyers who are looking to become owner-occupiers.

1:54Rob D:Jamie, thank you for your question. And yes, basically, I completely agree with what you've said. In fact, I talk about this a lot in my book, The Price of Money, and it's follow-up, Seven Myths About Money. We've talked about it on the podcast before as well. It's what we call the silent property crash. So the idea is that over the last few years, inflation has been pretty high. It's come down now, but inflation has been substantial and property prices have gone largely nowhere. So in real terms, property prices have come down 20%, I think even more than that. So that is a huge correction that most people haven't noticed.

2:26Rob D:What you're talking about with policymakers preferring a higher rate of inflation, you're basically describing something called financial repression, where the rate of inflation is higher than the rate of interest. And I think that's highly likely to continue as well. So yes, I can easily see a world where house prices keep on just going along, growing by 1%, 2 % a year. But in fact, in real terms, they are falling. An actual nominal correction though, house prices falling, I find that a lot harder to imagine. We've spoken about that on the podcast recently as well, but just for a number of reasons.

2:56Rob D:It just seems hard to imagine that that's on the cards. But that might all sound a bit gloomy, it's like, oh, house prices aren't going to do much for years. Yeah, but the point is, this is absolutely perfect conditions for people who have debt. So the reason that the government would be pursuing such a policy is that they have so much debt. So if you have debt as well, in the form of a mortgage, well, this is amazing. Because if inflation is high, then it is just effectively paying down your mortgage for you. It's reducing the real value of what you owe. You benefit from it in exactly the same way as the government does.

3:25Rob D:So for me, at least, I'm geeky. I think this is such an interesting point because people tend to think that to profit from property, you need a property boom. But in fact, you don't need a property boom. Even with inflation at Target, you're benefiting from it every single year. And in time, it does incredible things. But if inflation is running higher than Target, it just makes things even better for you. So while inflation hurts most people, investors, it can actually help. So Jamie, thank you for your question because it gives me a chance to talk about one of my favourite topics. I'm sure lots of other people have benefited from hearing that as well.

3:55Rob B:Right, next up we've got a question in from Marcus. Hello Rob and Rob, I hope you are both well. My name is Marcus. My current situation is I have one buy to let property. It has a fairly modest yield, although it does generate monthly income and it's more geared towards capital growth. I'm looking to buy two to three more properties this year. However, I've had a change in my circumstances and I'm now looking for high yielding properties so that I can generate more monthly income. Now I know in the past on the pod you've mentioned about higher yielding properties and that these tend to be cheaper properties and there can be some drawbacks to that around things like upkeep and maintenance, cutting more into the bottom line and an increased chance of problematic tenants.

4:47Rob B:The property I have at the moment has just run in the background. It's fully managed and I've had no problems with it whatsoever. And obviously going forward, I'd like that to carry on being the case so i guess my question is is if i'm chasing higher yields how can i mitigate some of the possible drawbacks that come with that thank you for your time and i look forward to hearing your answer marcus you know what i like that i like the fact that you've pivoted it may be your circumstances have forced you to pivot but so many people start with one strategy and then feel wedded to it and won't pivot when it's something that all property investors should constantly be reviewing.

5:32Rob B:You know, am I doing the right thing for me now? You know, have my goals, have my circumstances changed? Has my operating situation changed? Rob and I have publicly talked about how we changed our strategy after getting more experience and building our portfolios out. And it's great that you've identified that, you've had the awareness. So let's dig in to your question. How can you go for higher yielding properties but minimize the downside, which you've touched on is like upkeep and maintenance and the potential of problematic tenants? Well, one of the things you could do is when you're looking in higher yielding areas is to go for a property that's new or nearly new.

6:15Rob B:You can absolutely achieve that with a new build property in the right areas. We did some brilliant deals last year with Property of Invest in areas that were yielding really, really well. We believe that they were great for capital growth as well, the potential, but they were because of where the market was last year and the areas that some of the areas that we targeted, some of those deals had really, really strong yields. Most people think that we just do the capital growth deals, but in this market, sometimes you can get both. So I would go for new build because you're not going to have those maintenance issues.

6:46Rob B:New build properties come with a 10-year guarantee. The first two years are maintained by the developer themselves. The remaining eight is by insurance. And they've passed all the building regs, so you know it's been built to a good standard. The type of tenants you may be able to attract then should be stronger. You can check that through the referencing because your property is all shiny and new, and that's what tenants would want. They don't want old, tired properties. So going for that type of property can certainly put you on the right path. The other thing you must absolutely be doing, and I think everybody should be doing it now anyway with Renters Rights Act coming into place is having good insurance, tenant insurance.

7:24Rob B:So whether you've got going for the capital growth play or a high yielding play, I would get the insurance regardless. And if your tenant cannot pass the required vetting for that insurance to be issued, do not let it to them. I know it sounds harsh but i've been burned from this i went against this advice and it cost me dearly the insurance companies make money the reason they make money is because they make good bets let them decide whether your tenant is worth the risk or not and if they say no don't compromise wait a bit longer to get the right tenant in so with the right type of property and the right type of insurance you can really minimize your risk if that is your strategy i wish you the very best of luck marcus i'm sure you'll do well the fact that you're giving it this much for suggests to

8:13Rob D:me that you will best of luck well that is us done for this week and we'll be back to do it all again next tuesday but before then you can join us for the property podcast on thursday so we'll see you then bye-bye bye-bye