For the past decade, property has been the ideal investment for those looking to make money. Rising house prices, low interest rates and easily accessible mortgages meant that it had never been easier to get a foot on the ladder, even for those with poor credit histories or low salaries. 

Such favourable conditions prompted a housing market boom. Gazumping became the norm, professional landlords had as many as 20 properties in their investment portfolios and amateur landlords, aiming to fund their retirement, abounded.

The property party is over
Following the demise of Northern Rock last year, the credit crunch has seen many lenders withdraw from the market and/or tighten lending criteria in a bid to stem further liquidity problems.

According to the Halifax House Price Index, house prices fell by 1.3 per cent in April this year, with the demand for housing constrained by rising interest rates and a decline in real earnings.

Martin Ellis, chief economist at Halifax, expects ‘Mid-single-digit percentage decline in house prices this year with regional variations. Some areas are likely to record modest price rises while others are expected to see falls above the national average.’

Ellis adds that a drop in house prices is merely a correction and a crash is unlikely. He says, ‘Price falls should be viewed within the context of substantial price rises over recent years. UK prices have increased by 190 per cent between 1997 and 2007. Low interest rates, a growing economy, high employment levels, and a shortage of new homes underpin housing valuations.’

Capital attractions
With a return to steady pricing, investors looking for property returns need to understand that the days of making a fast buck are gone, but long-term consideration of the property type and location can still yield fantastic returns.

In the current climate it is vitally important to identify the areas that are holding up best. Traditionally, London has always produced excellent rental yield, especially in the right location.

According to the Rightmove House Price Index, Hackney was the top-performing London borough in April 2008, with average house prices rising by 3.8 per cent. This trend is likely to continue for the foreseeable future, especially given planned regeneration ahead of the 2012 Olympics and the London Crossrail line.

Other London boroughs that continue to reap rewards for investors are Kingston-upon-Thames, the City of Westminster, Islington and Tower Hamlets – another beneficiary of the planned Olympic Games.

However, certain areas of London have started to see the effects of a market downturn. Richmond-upon-Thames, Ealing and Waltham Forest produced the worst returns so far this year, with prices dropping by an average of 2.5 per cent.

Reverting to type
As well as location, it is essential to consider the kind of property other people would be willing to live in. ‘A bad choice is still a bad choice even in a region that tends to hold up well,’ says David Hollingworth, head of communications at mortgage broker London and Country.

Across all property types, ranging from one-bedroom flats to five-bedroom detached houses, Islington generates the strongest yields (5.43 per cent), with Kensington and the City also providing healthy returns at 5.19 per cent and 5.08 per cent respectively, according to estate agents Hamptons International.

Lesley Cairns, regional lettings director at Hamptons, comments, ‘Overall,one-bedroom flats have provided the strongest income ratio. In Q1 2008, the figures reveal that average yield was 4.85 per cent for a standardised freehold/long-lease flat of 500 square feet that is in good order.  Comparatively, a five-bedroom detached house with a garden, in good order and offering 3,000 square feet of accommodation provides an average yield of 4.12 per cent.’

She adds, ‘As a first-time buyer in London, the best place to buy, where you will get most for your money, is Dulwich. A typical one-bedroom property is available from £235,000 for approximately £300 per square foot upwards. As a tenant, optimal rental levels are found on four- and five-bedroom properties, in areas such as Chiswick (3.33 per cent) or Wimbledon (3.63 per cent).’

Looking further afield
Outside London, surrounding areas provide ideal investment opportunities, with many people moving out of the capital in a bid to get more for their money.

Buy-to-let investors looking to build their portfolios would do well to consider flats in the popular commuter towns of Brighton and Hove and St Albans, where rental yields are just above the four per cent mark. Aside from Greater London, house prices have also increased significantly during Q1 2008 in East Anglia (1.4 per cent) and the East Midlands (2.2 per cent).

Further afield, Scotland saw average increases of 0.2 per cent and is expected to continue to see its property hotspots make gains this year, with towns such as Lochgelly, Paisley and Greenock proving popular because of their excellent transport links to the neighbouring cities of Glasgow and Edinburgh, where house prices are substantially higher.

By contrast, despite areas such as Merthyr Tydfil in Wales seeing staggering house price increases of 203 per cent since 2002, Welsh house prices in general have fallen by 4.7 per cent since the beginning of 2008. However, towns such as Newport and Pontypool are expected to perform better than others during the rest of the year. 

Focusing on maturity
Danny Lovey, head of brokerage at The Mortgage Practitioner, warns, ‘The market is now so overloaded with new, or recent, builds that I have been advising my buy-to-let clients to stay away from them for the last two years. With property prices falling, the overhang of flats is likely to see the biggest potential falls. In my opinion mid-terrace houses are a better bet.’

Nevertheless, while short-term gains may be a thing of the past, investing in property can still yield healthy returns, provided sums are carefully calculated. Despite speculation that the economy is faltering, many commentators believe that the market is simply undergoing a correction, which means that investors extending property portfolios must look to the long term when making purchases. 

Long-term security
Peter Bolton King, chief executive of the National Association of Estate Agents, elucidates, ‘The credit crunch has affected market confidence, but it is important
to remember that the underlying factors supporting the property market still remain: constantly high employment levels, historically low interest rates and a pent-up demand for houses.’

He adds, ‘Therefore, rather than a dramatic fall, we are in fact looking at a return to a steadier market instead of the fantastic price hikes we have seen.’

Long-term investments can still bring home the bacon in the right areas and with the right type of property, so researching purchases carefully is vital. But for those looking to make a quick buck, those days are decidedly over.