According to the National House Building Council (NHBC) more than 9,300 new homes were registered to be built in Yorkshire and Humber last year – a decrease of 3.2% on 2016 levels of 9,700 dwellings.
Despite the decrease, this is still one of the highest number of new builds in the region since the pre-recession levels of the Credit Crunch and at a time of uncertainty with Brexit and the snap General Election.
So, when a landlord recently asked me why the brand new property she was considering buying was a lot more expensive compared to a second-hand/existing property of similar type, accommodation, location and structure I thought this would make a fascinating topic to do some homework on… homework I want to share with the homeowners and landlords of Rotherham.
Why does a new build cost more than a similar second hand property?
You might believe that the difference between purchasing a new build home against purchasing a second-hand/existing home is just individual preference.
Some buyers/tenants like the ostentatious trendy modern feel of a new home… whilst others like a home that has stood the test of time.
So, why does one usually cost more than the other?
Well, I am going to be looking at some statistics that shows there is a real difference in our local council area’s property market when it comes to new vs existing homes and the price paid.
Looking at the average price paid for existing (second-hand) homes vs a new build makes interesting reading. The graph below depicts these average prices since 1996:
On this second graph, one can see the percentage difference in average price paid between new and existing…
The overall average for the whole Rotherham Metropolitan Borough Council area for the ‘new build premium’ over the last 21 years has been 45.4%. (A new build premium is the additional price a buyer pays for a new property compared to a second hand one.)
Yet nothing is ever that easy – there are issues with these statistics…
Is there really a new build premium in Rotherham?
The problem with statistics for entire geographical areas on this scale is that it is impossible to completely separate all the different factors of type, accommodation, location and structure. This makes them really hard to compare.
For example, for truly indicative statistics, one would have to have a mirror image second-hand Rotherham home and a duplicate new build right next door to each other, then calculate out which house buyers or buy-to-let landlords would pay more for? Perhaps if all things were equal, in that situation there might not be any difference in what buyers would be prepared to pay…?
But then again, properties can often be considered in a similar way to new cars – there’s always a difference in price on the forecourt between a brand new car and a car with a few hundred miles on the clock.
Things are never wholly equal.
What I do know is that my statistics of the Rotherham property market show that new build apartments in our area are worth more to people than their second-hand equivalents, whilst the difference is negligible between new build Rotherham detached houses and second-hand Rotherham detached houses.
However, looking back at the graphs I believe that the really important lesson in all these statistics is the fact that the ‘new build premium’ for new-build versus buying a second-hand property increases in a buoyant market and reduces in a tougher market.
So, if you want to buy new and the only consideration is money… try buying in a tougher challenging property market.
Here’s a number to catch your attention… I’ve calculated that Rotherham’s Millenials are set to inherit £199,566 each in property! Huge numbers, but is all that it seems?
But before we start it’s important to define all these phrases that get banded about the different life stages (or subcomponents) of our society. What are millennial? Who is Generation X or Generation Z or the Baby Boomers? When terminologies like this are used as often and habitually as these phrases, it’s particularly vital we have some practical idea of what these terms actually mean. People use these phrases but don’t really know what they mean! I’ve used them but haven’t been exactly sure where the lines were drawn!
So, for clarity…
Generation Z: Born after 1996
Millennials: Born 1977 to 1995
Generation X: Born 1965 to 1976
Baby Boomers: Born 1946 to 1964
Silent Generation: Born 1945 and before
Even these dates tend to blur slightly around the edges and are sometimes contested.
Examining Rotherham by generation
Using these definitions, my research shows there are 12,218 households in Rotherham owned by Baby Boomers and the Silent Generation. It also shows there are 21,361 Gen X homeowners.
Looking at demographics, homeownership statistics and current life expectancy, around two-thirds of those Rotherham 21,361 Gen X homeowners have parents and grandparents who own the 12,218 properties.
These Gen X homeowners are therefore going to profit from one of the biggest inheritance explosions of any post-war generation to the tune of £1.788bn of Rotherham property or £125,458 each… but they will have to wait until their early 60s to get it!
What about Millennials?
It’s the Millennials that are in line for an even bigger inheritance windfall!
There are 16,238 Millennials in Rotherham and my research shows around two thirds of them are set to inherit the 14,774 Gen X properties. Those homes are worth £2.161bn meaning, on average, each Millennial could inherit £199,566… but again, not until at least 2040 and maybe as late as 2060!
While the Rotherham Millennials have done far less well in amassing their own savings and assets, they are more likely to take advantage of an inheritance boom in the years to come.
This will probably be very welcome news for those Rotherham Millennials, including some from poorer upbringings who in the past would have been unlikely to receive gifts and legacies.
Inheritance is not the magic solution for Rotherham Millennials
Of course, inheritance is not the magic weapon that will get the Millennials on to the Rotherham housing ladder or tackle growing wealth cracks in UK society. Inheritance is unlikely to be made available when people from this generation are trying to buy their first home.
Correspondingly, over 50% of females and around 35% of men are going to have to pay for nursing home care, which will reduce inheritance significantly. Interestingly, I read recently that a quarter of people who have to pay for their care, run out of money.
Therefore, if you are a Rotherham Millennial there potentially will be nothing left for you.
Is there a solution to help our Millenials?
Most parents want to give their children an inheritance. The thought that what you have worked hard for throughout your life not going to your children is a really awful one.
Maybe that’s why I am seeing a lot of Rotherham grandparents doing something meaningful and helping their grandchildren, the Millenials, with the deposit for their first house.
One solution to the housing crisis in Rotherham (and the UK as a whole) is if grandparents, where they are able to, help financially with the deposit for a house.
Buying is cheaper than renting – we have proved it many times in these articles… so it’s not a case of not affording the mortgage. The issue for Millenials is saving for the 5-10% mortgage deposit that is required.
Maybe families should be distributing a part of the family wealth now (in the form of helping with house deposits) as opposed to waiting to the end… it will make so much more of a difference to everyone in the long run. Just a thought – what do you think?
Yes, I did say ‘rentirement’ and not retirement… what am I talking about? ‘Rentirement’ relates to the 872 (and growing) Rotherham people who are approaching retirement but don’t own their own home. They are currently in their 50s or early to mid-60s and rent their home privately from a buy-to-let landlord.
With ‘retirement’ approaching and the expectation of little more than the state pension of £155.95 per week plus a small private pension which will only equate with a couple of hundred pounds a month, these retirees may only have about £200 per week once they retire at 67.
The difficulty with ‘rentirement’
The problem is that the average rent in Rotherham is £469 a month so most of the retirement ‘income’ will be take up in rent – the remainder will have to be paid for out of their savings or the taxpayer will have to stump up the bill. With life expectancy currently in the mid to late 80s that is going to be quite a big bill… over £98 million in the next 20 years will be paid from the tenant’s savings or the taxpayers coffers to be precise!
You might say it’s not fair for tax payers to pick up the bill and that these mature Rotherham rents should start saving thousands of pounds a year now to be able to afford their rent in retirement.
However, in many circumstances, the reason these people are privately renting in the first place is that they were never able to find the money for a mortgage deposit on their home or didn’t earn enough to qualify for a mortgage. Now, as they approach retirement with the hope of a nice council bungalow, the hope is diminishing thanks to the council house sell off in the 1980s.
For a change, it looks like those living in Rotherham who are aged 30-40 will be better off. Their parents are more likely to be homeowners who will cascade their equity down the line when they pass away.
This is what is happening in Europe where renting is common – the majority of people rent in their 20s, 30s and 40s, but by the time they hit 50s and 60s (and retirement), they are able to invest the money they have inherited from their parents passing away and buy their own home.
How will this impact buy-to-let landlords in Rotherham?
Have you noticed how the new homes builders don’t build bungalows anymore?
In fact some have said the desire for bungalows is over.
The waning in the number of bungalows being built has more to do with supply than demand. The fact is that for new homes builders there is more money in constructing houses than there is in constructing bungalows. Bungalows are voracious when it comes to the land they need because a bungalow takes up the same amount of square meterage as a two/three storey house yet is only on one level.
Here lies the problem – demand is increasing and will continue to increase whilst the supply of bungalows will remain the same. We all know what happens when demand outstrips supply… the rent price for bungalows will inevitably go up.
‘Rentirement’ is a pressing concern. Landlords, if you have a bungalow in your buy-to-let portfolio it might just be worth hanging onto it. If you don’t, make sure you keep your eyes peeled for any opportunities as these properties could prove to be worthwhile investments.
As I am sure you are aware, one the best things about my job as an agent is helping Rotherham landlords with their strategic portfolio management.
Gone are the days of making money by buying any old Rotherham property to rent out or sell on. Nowadays, property investment is both an art and science. The art is your gut reaction to a property, but with the power of the internet and the way the Rotherham property market has gone in the last 11 years, science must also play its part on a property’s future viability for investment.
There are many metrics that most property professionals (including myself) use to decide the viability of a rental property. These metrics include what properties are selling for, the average rent, the yield and an average value per square foot.
A forgotten metric
However, another metric I like to use is the average rent per square foot.
The reason being is that is a great way to judge a property from the point of view of the tenant … what space they get for their money.
Now of course, location has a huge influencing factor when it comes to rents (and therefore, rent per square foot).
Like people buying a property, tenants also have that balancing act between:
- better vs. worse location
- more vs. less money
- size of accommodation (bigger and more rooms equalling more money)
- where they live (location) vs. making ends meet
Interestingly, I know there are a lot of you in Rotherham who like to see my statistics on the Rotherham property market, so before I talk about the rental figures per square foot, I wanted to share the £ per square foot on the values.
In Rotherham, the current AVERAGE figures that are being achieved (and I must stress, these are average figures, so there will an enormous range within them) are worth considering. To begin with, here are the average figures split by type:
- Detached Property – £181 / sq ft
- Semi-Detached Property – £145 / sq ft
- Terraced Property – £118 / sq ft
- Rotherham Apartments – £152 / sq ft
So, the rental figures:
The extent of space you get for your rent is replicated in the space you get for your money when buying a property. The average size of rental property in the Rotherham area is 847.6 sq ft.
This means the average rent per square foot currently being achieved on a Rotherham rental property is £14.10 per sq ft per annum
(Interestingly, the national average size of rental properties is 792.1 sq ft – on average, rental properties are on average bigger in Rotherham).
What we can deduce from this?
Well the devil is always in detail!
Whilst I was able to quote the average overall figure and the fact my research showed it was quite clear from data that there is relationship between the average £ per sq ft figures on property values and average £ per sq ft on rental figures as a property grows in size.
However, something quite intriguing happens to those figures, in terms of what the property will sell for and what it will rent for, when we change and increase the size of the property.
My research showed that doubling the size of any Rotherham property doesn’t mean you will double the value of it… in either value or rent.
This is because the marginal value increases diminish as the size of the property increases.
In simple terms: subject to a few assumptions, double the size of the house doesn’t mean double the value. What really happens is that a doubling of size gives only 40-65% uplift in value.
But here comes the fascinating part – when it comes to rental figures, double the size of the house meant only 20-45% increase in rent.
In a future article, I will be discussing the actual added value an extension can bring… but in the meantime, I will make a sweeping statement: most of the time it makes sense to extend if you are going to live in the property as long as the extension is proportionate to the property, but if you are going to rent it out… possibly not.
As we dive further into 2018 I believe that the UK interest rates will stay low, even with the predicted additional 0.25% increase that is expected in May or June. That rise will add just over £20 to the typical £160,000 tracker mortgage, although with 57.1% of all borrowers on fixed rates, it will probably go undetected by most buy-to-let landlords and homeowners.
I forecast that we won’t see any more interest rate rises due to the fragile nature of the British economy and the Brexit challenge. Even though mortgages will remain inexpensive, with retail price inflation outstripping salary rises, it will still very much feel like a heavy weight to some Rotherham households.
A subdued local market – remembering that property ownership is a medium to long-term investment
Now it’s certain the Rotherham housing market in 2017 was a little more subdued than 2016 and that will continue into 2018.
Property ownership is a medium to long-term investment so looking at that long-term time frame; the average Rotherham homeowner who bought their property 20 years ago has seen its value rise by more than 203%.
This is important, as house prices are a national obsession and tied into the health of the UK economy as a whole.
The majority of that historic gain in Rotherham property values has come from property market growth, although some of that will have been added by homeowners modernising, extending or developing their Rotherham home.
Taking a look at the different property types in Rotherham and the profit made by each type, it makes interesting reading.
Looking to the future…
However, I want to put aside all that historic growth and profit and looking forward to what will happen in the future.
I want to look at the factors that could affect future Rotherham (and the country’s) house price growth/profit.
One important factor has to be the building of new homes both locally and in the country as a whole. This has picked up in 2017 with 217,350 homes coming on to the UK housing ladder in the last year (a 15% increase on the previous year’s figures of 189,690. However, Philip Hammond has set a target of 300,000 a year, so there is still plenty to go!
Another factor that will affect property prices is my prediction that the balance of power between Rotherham buy-to-let landlords and Rotherham first-time buyers should tip more towards the local first-time buyers in 2018.
The Council of Mortgage Lenders expects the number of buy-to-let mortgages to drop by 34% from levels seen in 2015.
This is because of taxes being increased recently on buy-to-let and harder lending criteria for buy-to-let mortgages, which means I foresee a gradual move in the balance of power in favour of first-time buyers rather than buy-to-let landlords. First-time buyers will also be helped by the Chancellor eradicating Stamp Duty for all properties up to £300,000 bought by first-time buyers in the recent budget.
This means Rotherham buy-to-let landlords will have to be smarter in the future to continue to make decent returns (profits) from their Rotherham buy-to-let investment.
Even with the tempering of house price inflation in Rotherham in 2017, most Rotherham buy-to-let landlords (and homeowners) are still sitting on a copious amount of growth from previous years.
How do Rotherham buy-to-let landlords ensure that growth continues?
That is the question for buy-to-let landlords in our area.
Since the 1990s, making money from investing in buy-to-let property was as easy as falling off a log.
Looking forward though, with all the changes in the tax regime and balance of power, making those similar levels of return in the future won’t be as easy. Over the last ten years, I have seen the role of the forward thinking letting agents evolve from a ‘rent collector’ and basic property management to a more holistic role – or as I call it, ‘landlord portfolio strategic leadership’.
Thankfully, along with myself, there are a handful of letting agents in Rotherham whom I would consider exemplary at this landlord portfolio strategy. These landlords can give you a balanced structured overview of your short, medium and long-term goals, in relation to your required return on investment, yield and capital growth requirements.
If you would like such advice, speak with your current agent – or whether you are a landlord of ours or not – without any cost or commitment, feel free to drop me a line.
Looking at the newspapers between Christmas and New Year, it seemed that this year’s sport in the column inches was to predict the future of the British housing market. So to go along with that these are my thoughts on the Rotherham property market.
With the average 5-year fixed rate mortgage at 1.98% (down from 3.47% in 2014) and 2-year fixed rate at 1.47% (down from 2.37% in 2014), mortgage interest rates offered by lenders are at an all-time low (even with the slight increase on the Bank of England base rate a few months ago).
Added to this, there has been a low unemployment rate of 5.6% in Rotherham, which has contributed to maintain a decent level demand for property in our area during 2017 – interestingly, an impressive 2,210 Rotherham properties were sold in last 12 months.
Finally, the number of properties for sale in the town has remained limited, thus providing support for Rotherham house prices.
As a result…
Rotherham property values are 4.2% higher than a year ago
However, moving into 2018, there will be greater pressures on people’s incomes as inflation starts to eat into real wage packet growth. This will wield a snowballing strain on consumer confidence. Information from Rightmove suggested over a third of property it had on its books in October and November had their asking prices reduced – this is the highest percentage of asking price reductions in the same time frame for over five years.
Still, a lot of that could have been house-sellers being overly optimistic with their initial pricing.
What will happen in Rotherham?
In terms of what will happen to Rotherham property values in the next 12 months, a lot will be contingent on the type of Brexit we have and the impact on the whole of the UK economy.
A lot of people will talk about the London property market in the coming year, and if the banking and finance sectors are negatively affected with a poor Brexit deal, then the London market is likely to see more of an impact.
Nevertheless, the bottom line is Rotherham homeowners and landlords should be aware of what happens in the rollercoaster housing market of Central London, but not panic if prices do drop suddenly there in 2018.
Over the last 8 years, the Central London property market has been in a world of its own (Central London house prices have grown by 89.6% in those last 8 years, whilst in Rotherham, they have only risen by 10.2%).
So we might see a heavy correction in London, whilst experiencing something a little more subdued more locally.
Brexit will play a major role
Hindsight is always better than foresight and predicting anything economic is all well and good when you know what is around the corner. At least we now have the Brexit divorce settlement sorted. As the UK economy and the housing market are intertwined, it all depends on how we deal with the Brexit issue as a whole country.
However, we have been through the global financial crisis reasonably intact… I am sure we can get through this together as well?
Oh, and house prices in Rotherham over the next 12 months?
I believe they will end up between 0.5% lower and 1.2% higher, although it will probably be a bumpy ride to get to those sorts of figures.
What do you think?
I would love to hear your thoughts.
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