Know Your Market Before You Invest

When properties are in short supply, it's tempting to snap up whatever is available just because it's available. And when prices are depressed, it's tempting to buy just because you can get a bargain. But those approaches are not reliable investing strategies.

We are seeing areas across the country where markets are saturated with properties that are not in demand and still other areas that are severely under-supplied. When the statistics for the entire UK market are averaged, it looks like prices are leveling out—but while it's important to watch the national trends, it's equally important to study local markets because they will provide the true picture for the professional investor.

As planning permission on virgin green field sites has become rare, developers are typically building high-density accommodations on brown field sites. The result has been a disproportionately large number of flats and very few single-family homes. At present, flats account for 20 percent of the UK housing stock, but they are 45 percent of all active new UK buildings. This market change is reflected in house prices. According to the independent property research and database firm Hometrack, in 2006 the price of five-bedroom houses rose by 11.5 percent; new build flats rose by only .05 percent.

In particular, city centres are experiencing a large increase in new build flats. Liverpool, Manchester, and Leeds are seeing falling prices for these developments as a result of this approach.

From the developers' perspective, it's certainly more cost-effective and potentially profitable to build eight flats rather than two houses on a particular plot of land. But with demand and prices for flats down and houses up, the flats are often being bought by novice investors who believe developer sales pitches and are expecting capital growth that may or may not materialize.

It's not enough to get a good price on property. You want to acquire the property at a good price and then be able to either let it for positive cash flow or resell it at a profit, and to do that you need to know your local market and understand sound investing strategies.

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