Easy money from property?

There’s blood on the streets of Britain’s housing market. Five successive interest-rate rises have gouged deep wounds, but the coup de grâce could be yet to come – an estimated 2m people on fixed-rate mortgages will have to take out new loans at higher rates within the next 12 months, sending their monthly payments soaring and reducing their ability to trade up.

Of course, the market, especially in London and the southeast, is being underpinned by a rising population and a shortage of housing. But we can only handle a certain amount of debt, which means prices cannot keep on going up at the same rapid pace for ever. There comes a point when something has to give.

Over the past decade, it has been possible to trade up the ladder simply by owning a place on it – as I know from my own experience. During that period, without moving more than a mile within the same patch of southwest London, I have gone from my first flat right through to a large house with private parking on my favourite street, all by refurbishing and extending each property. The builders move in next week to start digging out the cellar, which will mean that, so long as I can still afford the mortgage when our fixed-rate deal expires, we – that’s the wife and two kids – are all set for the future. I have no intention of moving again. Nobody has a crystal ball. I certainly struck lucky a couple of times with market timing, but we also bought and sold well, and did the right work on the right properties.

In paper terms, bricks and mortar have been making money at a far greater rate than I’ve been earning from my day job. And that’s true of many people. Owning land or property has always been part of the British culture, but it became an obsession during the boom years.

Having read, watched or surfed our way through the extraordinary amount of magazines, television programs and websites dedicated to all things property, we’re all now fully fledged, albeit self-certified, property experts.

Yet it has been much too easy (at least for those of us who got on the ladder early enough, if not for today’s struggling would-be first-time buyers). I meet people all the time who have made big mistakes in the past – going way over budget on the renovation – and have gone without punishment, as the market has effectively caught up and washed away their mistakes.

Don’t expect that to continue. Make a mistake in today’s market and you will have to pay the price. Most of us are not nearly as clever as we like to believe – and, yes, I include myself here. The genuinely stupid people, however, are the ones who, in the misguided belief that they were truly better off just because their house was worth more, went out and spent their increased equity – or paper money – on cars and holidays.

We’ve come to expect to make money on our homes. We’ve even come to demand it. So it is going to be a nasty shock when a slowdown means that isn’t going to happen. We will have to make a conscious effort to outperform the market, rather than simply ride it.

So, there you are, Mr and Mrs Average, with a sprog and a dog, squashed into your three-bedroom house, thinking about trying for another baby and worrying about needing a bigger place. What should you do?

Let’s imagine that you already have a decent slice of equity, but no great promotions or pay rises on the horizon, and that one of you would like to give up work when junior number 2 comes along. With the high costs of moving, and without the market to help this time, you’re going to have to get it absolutely bang on.

You will be forced to make compromises somewhere, so focus on finding flexibility – a home with room to grow into. It is always cheaper to build extra square footage than it is to buy it on the open market. You need to buy a property you can improve in terms of internal layout or fittings: one you can extend outwards (or up or down), or one in an area that becomes increasingly popular during the time you live there. The best opportunities combine all these elements.

Remember: “Location, location and location.” Well, I would say that, wouldn’t I? But it remains the truth – you’ve got to get it right to stand the best chance. The next district to “come up” and benefit from above-average price growth is likely to be one that borders an area that is already popular. Most buyers will be prepared to compromise on their ideal location in order to buy a larger property adjacent to their favoured position – hence this ripple effect. Even in highly developed and mature markets, it is still possible to find a few post codes surrounded by more expensive property on all sides. If the architecture in these emerging locations is similar, then, however shabby or unfashionable the area, the anomaly in values is likely to correct itself at some point.

Much of our housing stock was designed and built with the lifestyles of our Victorian and Edwardian ancestors in mind. These days, there is a preference for more open-plan, less formal living, with fewer but bigger rooms. Opening hallways, removing doorways, shifting corridors and repositioning partition walls are simple changes that make better use of the space and can provide a more contemporary environment, leading to subsequent increases in value. Kirstie Allsopp, my co-host on Location, Location, Location, recommends lying on the floor and looking up at the ceiling to gain a better perspective.

To increase the likelihood of outperforming the market, you’ll need to work harder to find a house that combines as many of the above elements as possible. Remember, any property can be a good deal – provided you buy at the right price.