- Inflation (and recessions) can be nerve-racking for people and their hard-earned savings and wealth.
- Yet there are six reasons which make investing in private rental properties a potentially wise investment in these changeable times.
- This article looks at how investing in Neath property could help you ‘hedge’ against inflation and protect your savings and wealth against the possible recession.
The cost-of-living
predicament is threatening the budgets of many Neath householders.
Inflation is running at 7.8%, yet the best
savings rates in the market are only 2.75% (because of low Bank of England interest
rates). This means that the value
of people’s savings is falling fast.
To add insult to injury, the possibility of a
recession on the horizon could add another nail in the coffin of people’s
wealth and savings.
Looking back at the last recession (ignoring
the 2020 Covid recession), the Stock Market (FTSE index) dropped 40.1% during
the Credit Crunch (2008/9) – scarcely a soothing thought if you worry about a
recession looming in the next couple of years.
A recession can have a catastrophic
impact on household budgets, as a weaker economy characteristically means that salaries
drop, and people get made redundant.
So, why do I suggest Neath rental properties will help to protect your wealth and hedge against inflation?
Neath rentals aren’t perfect, yet in many
ways, they go a long way to help – let me tell you why.
- One of the most significant benefits of investing in residential property is
to hedge against inflation. An ‘inflation
hedge’ is an investment that defends against the decreased
purchasing power of your money that results from the loss of its worth/value
due to inflation.
The last time
the UK suffered high and persistent inflation was the 1970s.
In 1973, the
average British house was worth £9,942. In 1980, that same house was worth
£23,287. If the same £9,942 had been invested instead in the stock market in
1973, it would have been worth £19,384 in 1980.
So how did that
compare to inflation?
Neither property
nor the stock market beat inflation in those seven years (as the goods and
services of that £9,942 in 1973 had risen to £25,897 by 1980).
But investing in
the stock market between 1973 and 1980, that stock market investor would have
lost 25.2% of their investment in ‘real terms’, compared with only 10.1% for
property investors.
However, there
was the bonus of seven years’ worth of rent!
To give you some
idea of what that would be worth in today’s figures (even if the rent didn’t go
up during that time frame) …
The average Neath landlord will earn £57,960 in rent over seven years.
- Rental properties have repetitive, regular monthly income,
whilst dividends from the stock market are dependent on there being profits
which, in a recession, can be hit and miss.
- Existing Neath landlords know
that the rents their rental properties achieve don’t historically decline
during recessions in the medium term.
In 2008, Neath rents dipped by 5.2%, yet they soon bounced back a year later.
And even if average rents do go
down, every rent is fixed at the start of the tenancy. Also, it is infrequent
for a tenant to negotiate a reduction in rent mid-tenancy even if average rents
did drop.
- Property prices sometimes fall
during recessions.
In the 2008 Credit Crunch recession, Neath Port Talbot property values dropped 22.4%.
Dropping from £119,596 at the
peak in November 2007 to £92,752 in February 2009 (before they started to rise
again).
Yet as I stated above, the Stock Market
dropped 40.1% with the Credit Crunch. Also previously, the Stock Market dropped
36% on Black Monday before the early 1990’s recession and 55.3% in 1974.
Which sort of drop would you
prefer?
- (Almost) guaranteed rental
payments. Insurance can be taken out for rental payments (you can’t get that on
stocks and shares). Also, the government will cover most (or all) of the rent
when someone is made redundant and needs to apply for social security. - For
those Neath landlords who take a mortgage, inflation can be a benefit. The
first is the effect of inflation on mortgage debt. As Neath house prices rise
over time, it reduces the loan to value percentage of your mortgage debt and
increases your equity. You will receive a lower interest rate when you
re-mortgage in the future because of the lower loan to value percentage.
Also,
as the equity in your Neath rental property increases, assuming you fix your
mortgage, your payments stay the same.
Finally,
inflation also helps Neath buy-to-let landlords because rents tend to increase
with inflation. So as rents go up, your fixed-rate buy-to-let mortgage payments
stay the same, creating the prospect of more significant profit from your
buy-to-let investment.
Yet, there are downsides to renting.
Rent arrears can be a worry though. However,
during 2021, landlords who used a letting agent were, according to an
investigation from Denton House Research, 272.5% less likely to be in arrears
of two months or more.
One of the biggest reasons is the more
stringent tenant referencing that letting agents tend to do compared to
landlords who do it themselves. At our agency, we like to reference tenants carefully
for job security, stability, and any history of non-payment on rents, always
liaising with previous landlords/agents to see if they were a good tenant.
That is why many tenants with a poor tenancy
record are attracted to properties that are not through agents, as they know
most (not all) DIY landlords don’t reference their tenants as thoroughly as
letting agents do. Solid referencing is not a 100% guarantee you won’t get rent
arrears or have your rental property trashed, yet it will go a long way to
mitigate it.
One of the things about investing in Neath rental
properties is that buy-to-let investors have more control over their
returns than stock market investors do. Buy-to-let provides long term stability
and constant income to counterweight the massive swings seen in the FTSE stock
market.
There is something reassuring about touching and feeling your investment – the ‘bricks and mortar’.
You must make your own decision when
investing in the private rental market in Neath. If you’d like to chat over the
phone for five or ten minutes to discuss where I would be investing in the Neath
property market, don’t hesitate to send me a message or pick up the phone.
How are you planning for the spectre of a potential
recession?
