There’s no replacement for getting out and talking to local agents to get a handle on market conditions in your local area. In addition to this the metrics you can find online can be a hugely helpful resource in assessing the health of the property market. Ideally you’re looking for an intelligible yet comprehensive indication of the state of the property market at a given time and in a particular location. In our view there are four key metrics that can quickly give you this type of insight:
– Gauge levels of local market activity through liquidity metrics
– Determine, through capital growth rates, whether house prices are rising or falling
– Check yields to view your rental income as a percentage of the price you’ll pay for property
– And assess whether rental growth rates indicate that your income return could grow over time
These are the four metrics we analyse in the latest edition of our Buy-To-Let Index, a quarterly research report on the UK Buy-To-Let market. So what do each of the above metrics tell you and why is it important to view these in conjunction with one another?
Local market activity
Liquidity can be measured by transaction volumes in the property market at a given time. It gives you an idea of how active a local market is and how easy it would be to buy or sell a property.
Low transaction volumes might mean it’s a difficult time to sell.
Are house prices rising or falling?
Capital value growth is a measure of house price growth over time. Strong growth can be a sign that a market is healthy and could hold the potential to generate long-term profit or could indicate that a market is becoming overheated or overvalued.
Sellers, looking to benefit from higher house prices, are often more active in a market that’s seeing value growth.
If capital growth is falling, when it comes to eventually selling your property, you run the risk of losing money, or falling into negative equity.
Rental income as a % of purchase price
Rental yield is annual rental income expressed as a percentage of property value. When
properties have a high rental income relative to the price paid for the property, the investment could potentially pay for itself. It could also begin to generate cash reserves, which could be used to repay a loan, for example.
Whilst high rental yield can make for a good property investment, it’s best not to look at this metric in isolation. Rising rental yields often go hand in hand with falling capital growth. It could be that rental income is high relative to the capital value of property, because capital value is falling or is anticipated to fall.
How might your rental income grow over time?
Rental price growth tells you whether rental incomes in a particular area have risen or fallen over a period of time. Unlike rental yield, rental price growth in an area isn’t proportionate to the capital value of property.
Rising rents may be the result of a shortage of suitable properties, coupled with strong consumer demand, both from people priced out of the housing market and those who find renting better suits their lifestyle.
Rental growth can help determine whether an investor will be able to let their properties at economic rents over the long term. In a property market where capital values are starting to cool an investor might look to areas of high rental growth to determine the ultimate success of their investment.
Make use of property data resources
The LendInvest Buy-To-Let Index
Every quarter we rank the best postcodes for buy-to-let across England and Wales, taking liquidity, capital value growth, rental yield and rental growth into account. Read the latest research here.
House price indices
We also round up the latest data on house prices from the indices mentioned below in a monthly house price watch.
Some major property businesses produce regular research into the small-scale property development markets that are typically instructive and useful to help determine the right locations, gauge pricing and interpret current market dynamics:
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