One of the key considerations for buying a holiday home or second home has, especially over the past 10 years has been the future value of the property. In the environment of rising prices we saw between 2000 and 2008, anyone buying a second home will have seen a pleasing increase in the value of their investment which has been a key driver in the popularity of holiday home ownership.
But since the financial crash in 2008, prices have dropped, risen a bit and the outlook for 2011 seems downwards again, while demand and the number of transactions remains significantly below what is deemed to be a healthy market.
The Impact on Holiday Home Values
The purchase of a holiday or second home is very different to that of the main home. The average buyer is more affluent and has access to a large deposit and is often a cash buyer. But the key difference for the holiday home market is the resilience against falling prices and demand. Second home owners, when faced with a weakening market, are more reluctant to sell and happy to keep the property until the market is more buoyant. They are typically under less pressure to sell; after all this was a purchase bought 50% with the heart and 50% with the head.
Anecdotally, owners faced with a financial squeeze in South Devon, are more likely to make a house available for holiday lets rather than reduce the price. So the number of transactions may be significantly down and bad news for local estate agents, but the prices achieved when eventually sold are more resilient.
You can see this in the latest house price report from the Land Registry, published in May 2011. This shows the regional fluctuations in prices. Their stats for March 2011 show that, year on year across the country, prices are down 2.3%. In popular holiday home counties the trend is Cornwall -0.6% and Devon and Devon 2.0% up. Other tourist hotspots, such as the Lake District, the Cotswolds and the Peak District are harder to analyse as they fall into their respective counties which change the figures somewhat. You can see the Pdf report at http://www1.landregistry.gov.uk/upload/documents/HPI_Report_Mar_11_db10pv4.pdf
But the holiday home market is not immune from price changes and the wider economic climate which has seen less funds available for property purchases and less money in everyone’s pocket. And house price trends when viewed from a different perspective, that of the rental return provides a different perspective...
Impact on rental returns
The Land Registry statistics show that the average house is now worth over 2.5 times more than what is was in 1995. But has the cost of renting a holiday cottage increased at the same rate? Well, no it hasn’t, and while the market has moved forward and there quality accommodation now books at well over £1000 per week in the peak season, achieving a healthy percentage return is 2011 is harder.
Let’s take a typical example; a 2 bedroomed cottage purchased for £200,000 in a popular tourist area may achieve 25 bookings in the calendar year and gross £12,000. The costs of running the property, including cleaning, maintenance, marketing and utilities will be in the region of £5,500, leaving £6,500 or a 3.25% return. Then any mortgage costs need to be factored in plus tax on the income, which is less beneficial with the changes to the Furnished Holiday Lets tax relief.
So house price fluctuations affect both the ‘haves’ and ‘have nots’ of the holiday home industry:
The Haves: “As an existing owner I want prices to stabilise and increase”
The Have Nots: “I want prices to come down to a more affordable level where I can see a better % return on my purchase”.
So when is a good time to buy?
With prices in decline would be the answer, though this is advice which applies to property as a whole and is not particularly insightful. It could be argued that lower acquisition costs will make holiday home ownership more feasible and attractive to professional and amateur investors alike and therefore boost sales in tourist areas.
With high prices it is ever more important to follow these steps when looking to buy:
- Research the area – visitor numbers and trends.
- Research the competition – what do they offer, how much do they charge, are they fully booked.
- Research the costs – understand what is involved in changeovers and running costs.
What are the key indeces to watch?
The UK Land Registry record the actual property transaction amount and claim to be the most accurate record of price trends - http://www.landregistry.gov.uk.
Halifax and Nationwide record price trends based on transactions financed by themselves and their banking group. http://www.lloydsbankinggroup.com/media1/research/halifax_hpi.asp and http://www.nationwide.co.uk/hpi.
Rightmove release data based on the asking prices of property on their site, though not the actual transaction price - http://www.rightmove.co.uk/news/house-price-index.
The Bank of England produce statistics and lending levels. http://www.bankofengland.co.uk/statistics/li/2011/mar/.
