House prices

In my opinion the horse has already bolted as far as better than average returns go on buy to let ventures. Therefore getting in now will have an unfavourable risk reward ratio compared to say 1, 2 or 3 years ago.

If you watch the C4 programme "Property Ladder" you will notice that the presenter Sarah Beaney who is an undisputed property developing expert nearly always comments that the developers featured have made most of their profit through the underlying sharp growth in house prices rather than through any great eal of business skill. In many cases the rental income (assuming 12 months full rental) doesn't achieve much more than 5% of the value of the property.

My advice to any potential "buy to letters" is assume 5% p.a. rental income and only a 3% p.a. increase in property values and then decide if you still want to do it.
Also remember that as the owner of a buy to let you still incur costs such as buildings insurance and house repairs whether you have tenants or not.

Overall, I think buying to let currently is only suitable as a medium to long term venture and the short term gains recently experienced are very unlikely to continue. Indeed, the extreme recent growth in buy to let properties may well in itself act as a catalyst to a sharpish fall in property prices.

Property prices are very similar to share prices in as much as it is only an active 2% of the total properties that exist that determine the market price of all properties in existance. In other words all prices are largely artificial and based on short term sentiment. Real values can only logically be determined by a combination of rental income ratios and a comparison with the cost of building a new property from scratch.

The "property shortage" argument is a red herring put forward by self interested parties. If interest rates went up to 10% tomorrow morning we all know that property prices would plunge and what would happen to the so called "property shortage"?!! If there is such a big property shortage then why aren't there thousands of people living on the streets in cardboard boxes?