Over the past year or so there has been considerable turbulence in the property market, and many things that we’ve come to accept as universal truths simply aren’t that certain any more. In London, for instance, it has for a long time been a given that buying a neglected old house and doing it up would result in increasing its value and therefore making a profit. But is this still the case? With higher interest rates and the rising cost of building works, is it still a wise move to buy a doer-upper?
In gentrified parts of London, Victorian terraces routinely display vast glazed kitchens and tiled roof dormers. Many years of low interest rates and cheap borrowing, coupled with an easy supply of builders and materials, created a situation where seemingly everybody was extending their homes by converting the loft and opening the kitchen into the side return. Remortgaging to extend your home was easy and inexpensive and the situation was a no-brainer. Unmodernised houses would go to sealed bids as buyers queued up to embark on elaborate architectural projects, safe in the knowledge that their investments would pay off.
But things have shifted slightly. Hamish Allen of Winkworth Islington, Highbury, Hackney and Shoreditch notes: “Over the past few years, interest rate rises and building costs have definitely dampened the desirability of those properties that require work.” As a result there’s less competition for someone who is prepared to take on a project. “Increased refurb costs have had a massive impact: people are thinking twice about taking on a project and the increased risk that comes with it. People just aren’t as attracted to places that require work. There’s no getting away from the fact that debt just isn’t as cheap as it was pre-Covid. “There’s a lot of pressure on what people are prepared to spend. Building costs are continuing to rise due to Brexit and Covid, and the ‘improve don’t move’ phenomenon depended on the availability of cheap credit. We used to see a lot of people refinance for an extension, but if it’s now 4.5% on say £300,000 then you’re looking at an extra 13k a year in interest, which is pretty significant.
Moreover, the increase in rental prices over the past year – a rise of more than 12% on average – means that anyone looking to move into temporary accommodation while they make significant changes to their home will need to factor in increased rental costs. “This is a big consideration for families, and it is off-putting for a lot of people,” says Allan. Ultimately, it is easier to sell houses with side returns and lofts already in place. “Buyers are more focused on reducing their debt rather than keeping money aside for building works.”
However, there are still options for someone looking to make a profit on London property. “If you’ve got an ability to create extra space then the margins are there,” says Allan. “If you’re buying solely to make profit, then auction sites are the place to go and you can still pick up deals. Plus, now that rates are forecast to drop it’s a good time for buyers to get in at the moment while we’re still seeing last year’s prices. The election next year should give us a really good run and buyers who have been sitting on the fence for the past six months are likely to spring into action.