It is no secret that getting on the property ladder has become increasingly difficult for millions of people across the UK, and in 2023, we saw house prices hit all-time highs with the highest price-to-wage ratio hitting crazy numbers.
If you look at the historical graphs of home prices as a percentage of annual salaries, then you can see that we are currently seeing some of the highest rates that we’ve ever seen, making life so much more difficult for those people who really want to get on the property ladder, and if you live in London, let’s just say the odds are stacked even more against you.
In this article, we will help you make a decision about whether buying a house is even the right thing for you to do. Plus, it’s important to recognise that there are many ways of dissecting the question of should you buy a house in 2023 or wait for recession?
We will also cover this question from both perspectives. If you want to separate investment properties from residential properties, I believe that’s really important to do, and each of these opens up its own set of questions that we must all wonder about before we go out there and make a decision about buying a property.
Let’s start with investment properties.
First, I want to begin by listing a few points that I want you all to consider and think about when it comes to investment properties. Now, the traditional means of buying a rental property, i.e., buying to rent, is not something that I would personally be looking to do this year.
It’s simply not as appealing.
- The rates are high.
- The legislation is highly favorable to a tenant.
However, the thinking processes of two people may be different. You might be more risk-averse than I am; you might not want to invest in real estate full-time; or you might simply want to move your money from a bank into bricks. Then your decision to buy a rental property, even in these times, is potentially a better prospect than just leaving your money sitting there in a bank doing nothing.
Is now the best time to buy an investment property?
If we follow the traditional rule of putting down a 25% deposit on a purchase, the answer is maybe. If you are happy in your employment. For an example, let’s say you have cash that is losing value daily to inflation in a bank that gives you just one or two percent. It may be worth doing, but only if the returns on the rental property that you’re seeing are higher.
But before jumping into the conclusion, let’s talk about opportunity costs.
Let’s say the market does down even by 15% whether you want to call that a correction or a crash that’s significant with over 2 million refinances happening this year alone and more landlords leaving the market than we’ve seen in recent years and the cost of living really impacting people.
Could there be better opportunities if you just sit on the sidelines for a few moments, and by a few moments, I mean months or years, perhaps by waiting for the right opportunity you’re seeking? In the current market that we are in, you could well make instant equity if you’re able to buy at a great price, and then, my friends, it’s a no-brainer to buy right now.
But similarly, if you buy a property at the top of the market and see a wobble, you may also have the possibility of negative equity occurring upon a refinance, and then you’ll find yourselves needing more years to get that return on investment and having to put your own cash back in. This is why I urge people to really understand their numbers and the math behind monthly payments; for that, you can use a simple EMI calculator.
Residential Properties: You will almost certainly find yourself buying with emotion and then rationalising with logic. For example, many people like to overspend during the stamp holidays, but they’ve probably convinced themselves they needed that extra bedroom because of lockdown, a larger garden because of space, or other reasons.
And the truth is, we all do it every single day with our decisions. Sometimes we skip the gym to tell ourselves we can work out twice as hard tomorrow. But the truth is, we can work out twice as hard tomorrow and still go today.
So recognise that residential property purchasing is sometimes more emotional than it is logical because many people are obsessed with owning a home, and I’m not saying that’s right or wrong.
I’m just saying that an obsession can sometimes lead to poor choices if you haven’t ruled out all the other options available to yourself.
Similar to investments, if property prices fall by five to ten percent from the amount you bought it for when refinancing, you may face negative equity. So be sure that you are comfortable with the price that you paid, and you’ve done your own analysis, so you know what you want to pay for it based on what you think it’s worth.
This isn’t the price the agent or the vendor asks for; it’s what you’re happy to pay and what you believe it’s worth, and this is why, again, you need to know your numbers. Remember, rates aren’t what they used to be, so the larger the mortgage, the more you’ll be paying over the term, which leads me onto deposits.
There are two basic thoughts here: do you put down five percent? Or do you max out your deposit, so you’re paying less debt?
Again, the answer to which one you should do is, “It depends.” Personally, I don’t like five percent deposits; however, hypothetically speaking, that’s not your situation. If I were ever to buy a residential property, then I would at least assess the following options:
Let’s say I was going to put down a 20% deposit on a particular property, but I actually had 80,000 pounds available. Then I would be thinking, “How can I utilise the sixty thousand pounds?” Maybe I would pick up one or two properties for investment in the hopes of achieving, let’s say, 500 pounds net per calendar month on both of them. So at the moment, the returns aren’t that great.
That 500 pounds would then have helped me towards my mortgage, while knowing that I also have two assets that are going up in value over time and could be potentially paid off by the tenant.
Now that’s a little risky. But
Some of you may bring in a higher deposit, and paying the mortgage may be the number one goal for yourselves; investing on the side either doesn’t appeal to you or just sounds like too much work, and if that is the case, a higher deposit could definitely work for yourselves.
But the question remains: Is 2023 the year to be doing this?
Sadly, friends, nobody knows. But what we can do is make the best decisions based on the facts we currently know, and here are some things I believe will happen: inflation will come down at some point, especially if the Bank of England continues to increase the base rate, highest prices will drop at some point, correction or crash.
Let’s get into specifics: I believe inflation will continue to rise and the government will not save you, which is why you must create your own income streams and learn to save or increase your current income in order to become more valuable in the marketplace.
I hope this article helps you consider the worst-case scenarios before deciding whether this is the year to buy a home and gives you an answer to the question, “Should I buy a house in 2023 or wait for a recession?“