Is Now the Right Time to Invest in a Second Property?

Second home market growth and falling house prices could be a combination for success.

There’s been a clear positive correlation between profit and demand of Airbnb rentals since 2020, and statistics show that the business made a remarkable recovery after the pandemic — the company’s losses of $4.5 billion in 2020 compared to $352 million the following year attest to this. 

Airbnb has already demonstrated its resilience to market shifts, but there may be another widespread slump that actually works in the favour of aspiring property investors — the widely anticipated UK housing market slowdown. 

Sources have predicted an eight per cent drop in property prices as a result of the ongoing economic crisis, and the forecasted downward trajectory could see homes being sold for substantially less than the highs experienced in summer 2022. This broadens the scope for those looking to invest, with bigger cities set to see the most significant price drops.

Cheaper properties may saturate the Airbnb market - should investors be wary and can this be combatted?

Of course, cheaper property prices may prompt many investors to take action, and there’s a chance that the Airbnb and holiday let market may receive an influx of new homes all across the country. This shouldn’t necessarily discourage those considering buying an investment property, but it should make them approach their investment with a bit more foresight. 

Want-to-be Airbnb hosts and holiday home owners should view any property strategically — thinking about the type of person staying in your property, the purpose of their stay, and the duration. From having easy access to transport links for commuters, or providing onsite parking for those who plan on exploring the surrounding area; we’d definitely recommend reviewing the bigger picture and finding the true selling points of your place.

How will Inflation impact mortgage rates for a second home?

Cashing in on falling property prices will contend with the impact of government efforts to curb inflation — and for investors, this will likely drive mortgage rates up. The UK has been gripped by double-digit inflation figures since August 2022, with similar levels last recorded in 1972. 

Predictions for UK inflation rates to fall below 10 per cent in March are being shaped by an increase in the Bank of England base rate, which means higher borrowing costs on mortgages. There’s a lot of unknowns around the nature of the decrease in inflation we’ll see in the future, and mortgage rates will still be subject to the Bank Rate. 

Investors that can accommodate longer-term stays may be at an advantage of sorts, as on the other side of the property market, rental prices for long-term tenancies have also hit record highs. There’s an opportunity to boast better value fees for people that require long-term accommodation, but it’s worth reading up on Airbnb mortgage options prior to considering this if you intend to switch to short-term stays later on down the line. 

Some finance options, such as buy-to-let mortgages, may place restrictions on how often you can have paying guests at your property.

On the other hand, holiday home rentals may continue to be popular in certain parts of the country. Whilst increased mortgage repayments and the subsequent increase in accommodation rates may deter some holidaymakers, it’s probable that this will vary depending on region and the demand for accommodation in each area. Properties in more popular areas will likely remain at the usual level of occupancy throughout the year.

Rising costs elsewhere shouldn’t be forgotten

Utility bills are often an overlooked cost when purchasing property as they come after completion, but with the recent rise in average household energy bills, investors should be paying close attention to the energy performance certificate of properties.

Energy prices are set to remain high for a while, perhaps even after interest rates fall so investing in a property with better energy efficiency will help to keep bills lower and your profit margin higher.

Further to this, upcoming EPC laws for landlords state that a property may need to have an EPC of C or higher to be let for new assured shorthold tenancies. Investors looking to let out second homes for long-term tenancies will need to consider the cost of work needed in order to meet these standards if the property currently falls short. 

Depending on the extent of any required property improvements, this may affect the affordability of your purchase. Utilising a second home as a holiday let may be more appealing to investors trying to avoid having to do this kind of renovation work. 

On the subject of bills, from April 2023 holiday let owners will need to register their properties and prove that they are occupied for at least 70 days per year to access small business rate relief and avoid paying council tax - something to consider if you are looking at purchasing property in a less popular holiday area. It’s also worth looking at the government information on tax rules for Furnished Holiday Lets. 

So, is now the right time to invest in a second property?

The Airbnb and holiday let industry will be in a unique position once we start to see the impacts of the factors outlined above, so many investors will be waiting out the uncertainty and then acting once we start to see some movement around things like property value and inflation.

If you are keen to purchase a second home sooner rather than later, it is worth planning in advance and considering a multitude of personal and economic variables when making this decision. For example, whilst mortgage rates may be increasing, those lucky enough to have a large deposit will be able to offset some of this impact by taking a smaller loan. For those with a smaller deposit, patience may be key.

That being said, there’s also the location to consider as snapping up a property in an area of greater demand could see your earnings soar and your home loan decrease rapidly.

If you’re a host who’d be able to accommodate longer-term tenancies in the short term, you may be at an advantage, but it’s worth noting that landlord mortgages may also be more costly due to higher interest rates. As mentioned previously, you would also need to consider the costs associated with reaching an EPC rating of C if the property you are buying isn’t currently at that standard. 

For this reason, the biggest income gains to be had will be for those with larger deposits, avoiding the higher interest rates of current mortgages at this time. For investors looking to buy in sought-after areas, purchasing a holiday let may still be a worthwhile investment.

* This has been written by home and property insurance firm Pikl * 

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