The Croydon Property Market is a very interesting animal and has been particularly fascinating over the last 12 years when we consider what has happened to Croydon rents and house prices.
There’s currently much talk of what will happen to the rental property market following Brexit. To judge that, I believe we must look what happened in the 2008/9 credit crunch (and what has happened since) to judge rationale and methodically, the possible ramifications for long-term investors in the Croydon property market. You see, an important, yet overlooked measure is the performance of rental income vs house prices (i.e. the resultant yields over time). In Croydon (as for the rest of Great Britain), notwithstanding a slight drop in 2008 and 2009, property rentals have been gradually increasing.
The income from rentals has been progressively increasing over the last 12 years. Today, they are 33.3% higher than they were at the beginning of 2005. In fact, over the last five years, the average growth has been 3.6% per annum. From a landlord’s point of view, increase in average rental income is not to be sneered at. However, the observant readers will be noting that we are ignoring an important factor – our friend inflation.
What is Inflation and Why Does it Affect Your Rental Property in Croydon?
A lot of people find it difficult to understand the relationship between inflation and ‘real’ spending power. Ignoring the title of the article for one minute .. let’s us assume that there had been no rental growth since 2005. For the purposes of the telling the story, we have a landlord with a rental property, that in 2005, they rented for say £900 a month. Roll the clock forwards to today, and that property is still being rented at £900 a month today. While the landlord is not getting any less income, this £900 is no longer worth as much when it come to what they could afford to buy with that £900 a month. Let me explain, in 2005, £900 may have bought a two-week 4* holiday in Italy. Yet, holidays have increased in line with inflation (which has been 38.5% since 2005), so our holiday would cost today £1,246 (£900 + 38.5% inflation = £1,246). Therefore, the landlord could no longer afford the same holiday, even though having the same amount in pound notes from their rental property.
This means when we compare rents in Croydon to inflation since 2005, Croydon landlords are worse off today, when they receive their monthly rental income, than they were in 2005 by 5.2% in real terms (rents increased by 33.3% since 2005, less the 38.5% inflation since 2005 – net affect 5.2% drop)
I suggest you watch this 8 min video on inflation if you want a bit more clarity.
It’s all Good!
However, rental income is not the only way to generate money from property as property values can increase. Although in the short term, cash flows are diminishing, many Croydon landlords may be content to accept that for a colossal increase in capital value.
Property values in Croydon have risen by 76.1% since 2005
This equates to a reasonably salubrious 6.34% per annum increase over the last 12 years. Even more interesting that this includes the 2008/9 property crash, this will make those Croydon landlords and investors feel a little better about the information regarding rents after inflation.
Moving forward, the prospects of making easy money on buy to let in Croydon have diminished, when compared to 2005. Last decade, making money from buy to let was as easy as falling off a log – but not anymore.
It would be true to say, my rental income verses property prices study does lead to noteworthy thoughts. I am often asked to look at my landlord’s rental portfolios, to ascertain the spread of their investment across their multiple properties. It’s all about judging whether what you have will meet your needs of the investment in the future.
It’s the balance of capital growth and yield whilst diversifying this risk.
I’ve been saying the same thing for quite a long time now!
If you are investing in the Croydon property market, do your homework and do it well. While some yields may look attractive, there are properties in many areas that do not have the solid rudiments in place to sustain them. If you are looking for capital growth, you might be surprised where the hidden gems really are. Take advice, even ask your agent for a portfolio analysis like I offer my landlords. The clear majority of agents in Croydon will be able to give a detailed analysis of past and anticipated investment opportunity (especially the awful effect of inflation) on your portfolio. However, if they can’t help – well, you know where I am, the kettle is on!
A few of you have asked me on some reading material which I own and read myself. I would strongly recommend you read the following books, the are all on Amazon and for the sake of a few quid, it will help you understand property investment and most of the details needed to be successful in this industry: