Over the last few weeks, I have heard a lot of potential real estate investors talk about waitng for the right time and the right price. I hate to be the bearer of bad news, but you are not going to benefit from price cool-off in the property market. Here's why!
Property prices are inversely proportional to interest rates, and unless you are going in all-cash or you have been smart enough to lock in interest rates for a certain facility like the Blackrocks of the world, your return on equity (as a % of capital employed) is likely to remain the same assuming you are able to get a steep discount.
Let's see it for ourselves with a numerical example -
As you can see from the table above, rents remaining constant, you will need 20% lower price to achieve the same Equity Return based on the difference of cost of leverage between earlier this year v/s current interest rates for buy-to-let mortgage.
While many "experts" may warn about "crashing property prices", very few will talk about the impact of this on your potential investment. If you've not made an investment when rates were lower, you will have to wait to wait for the rates to come back to these levels again by which time the prices would have gone back up. Unless you are going in all-cash, you are unlikely to benefit from short term price corrections which are caused by the pressure of rising interest rates.
Unfortunately, this is not 2009-10 when property prices cooled down due to oversupply caused by financial crisis while central banks around the world kept interest rates near zero as a deterrent to entering a recession / to fuel growth following the financial crisis. It is the exact opposite this time around where central banks will continue to raise rates until they bring back inflation to the 2% level.
Read more about house prices in 2023 in UK
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