Friday, Oct 26, 2007
Disastrous auction results
Andrews Robertson: October auction results
Not exactly a news item, but I hope interesting nonetheless: the results from a London auction yesterday. Percentage of lots sold in auctions this year: 85%, 79%. 74%, 79%. Percentage sold yesterday: 53%.
Lot 150 was a three-storey townhouse on a Barratt development 15 minutes' walk from the centre of Durham (and opposite my rented house). Bought new for £367,000 in March 2006. Previously on sale for £295,000. Sold at auction yesterday for £220,000. So in 19 months it lost £147,000, or 40%, or £246 a day. I think it is still overpriced. It will fetch £900 a month in rent, so for a 6% gross rental yield, it is worth no more than £180,000.
We don't necessarily need predigested statistics reported by semi-numerate journalists to tell us what is happening in front of our eyes.
12 Comments
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1. David Smith's Sub Prime. . . said...
so for a 6% gross rental yield, it is worth no more than £180,000. We don't necessarily need predigested statistics reported by semi-numerate journalists to tell us what is happening in front of our eyes...
Interesting Monty.....
2. uncle tom said...
The percentage going unsold is significant - there are always some properties where the vendors need a reality check, or there simply wasn't anyone particularly interested; but nearly half going unsold indicates a collapse in speculative interest, and without the speculators, the market is holed beneath the waterline.
Your figure of 6% as a viable rental return is correct. If renting is to provide an adequate return in a market that does not have hyper house price inflation, a rent of 0.5% property value per month is needed. However, if the money to buy the house is partly borrowed, I would argue that a higher return is needed to offset the risk element.
3. Urine Trouble said...
I looked at BTL 10 years ago and with a 85% loan your rental was 1% of the property value ( market price, sorry ) and so was viable, untill this happens again not worth it in my book!
4. confused76 said...
Monty
this is a great post! thank you
5. planning4acrash said...
6% is a rubbish return. The first thing I learned in accounting at business school is that you assess yield relative to what you could earn from secure bank accounts and government bonds. The real yield is negative or under 1% here given that you can earn over 6% by putting cash into a bank account.
6. Sumo_barry said...
Great post Monty,
This really brings clarity to the market as summed up by Uncle Tom.
It is interesting to see that this auctions site http://www.barnardmarcusauctions.co.uk has a similar service and their auctions are two days before Andrew Robertson (cant have buyers in two places at once as that would reduce the demand from the speculators). Interesting to see that the amount sold went from 78% in July to 68% in October, not quite such a dramatic change as Andrew Robertson auction but similar trend none the less. (click on the "Current Auction" link on theleft hand side of the page to view - interestingly you can drill down and see each property for sale like on Andrew Robertsons site, but it also gives the first bid amount, last bid amount and the reserve price if it didnt sell).
This looks like the start of the speculators loosing interest and that could be the start of the significant correction.
Sumo_Barry
7. uncle tom said...
p4c
You are missing the fact that in a stable market, the capital value of the property will keep pace with wage inflation - currently about 3.5%. Of the headline rent, around 55% will come home after void periods, maintenance, insurance, bad debt and management costs are taken into account - so about 3.3% typically.
Together, the total return is better than any savings account, but not as good as the equity markets, where the risks are normally higher.
At the moment though, only a fool would regard houses as a safe investment!
8. Tulipmania said...
In normal circumstances* I think 6% is just about acceptable as a minimum starting yield. Whatever house prices may do rents are likely to continue to slowly tick upwards over time so even if your starting yield is 6%, say 4-5% after costs, I think that's ok because in a few years it should be more like 7-8% and continue up from there. In addition you are likely to make capital gains over the long term. If you think about a 25 year time span it's likely to be a complete winner.
That is of course assuming 1) you have the liquidity to survive the first few years when your yield could be less than the cost of any borrowing you have to make, 2) you have enough in reserve to survive any rise in interest rates and 3) your target tenants aren't about to get sacked.
*Of course you'd be absolutely raving mad to take a 6% return at the moment because that would involve buying a house when the price of houses is about to fall off a cliff, but when a crash isn't imminent I think 6% is ok.
9. Bertywooster said...
you may find this link useful, it has some auctons and their results in England.
www.propertyauctions.com/
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