How do you assess the health of the property market?
When you’re buying an investment property you want to know you’re investing in a healthy property market. Likewise when you’re looking to sell, there are some metrics than can help inform your timing. So what are the best metrics to look at?
To get a comprehensive view of the property market nationwide or locally it’s best not to consider metrics in isolation. Whilst a property price index might give you an indication of price movements in a particular area, it doesn’t tell you how liquid the market is; how many transactions are actually taking place. At the same time trawling through endless statistics is likely to confuse your perception of an investment opportunity, unless you’re a data analyst.
So 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:
- Liquidity (transaction volumes)
- Capital value growth
- Rental yield
- Rental price growth
These are the 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?
4 metrics to help inform your property purchases and sales
Liquidity
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.
Capital value growth
This 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 yield
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.
Rental price growth
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.
The final picture
Taken together these metrics provide a useful overview of the property market for an investor. You can
- 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
Useful 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 round up the latest data on house prices from the indices mentioned below in a monthly house price watch.
- Industry research: 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: