House prices are complicated and their future direction is hard to predict. I’m often reminded that there are only two types of ‘expert’ when it comes to predicting house prices – those who don’t know & those who don’t know they don’t know. However the future direction of prices lies behind the question I am most frequently asked – “should I rent now or buy?” but having warned you that nobody knows here’s my best guess at what is going to happen and why.
The coalition Government seems determined to ramp house prices over the next 444 days ahead of the General Election next Spring. Voters are alarmingly forgiving of politicians financial mismanagement of the economy if you let them feel good about the value of their home. Of the nations 24m homes, one third own their property outright, one third own with a mortgage and the remaining third rent – half in social housing half in the Private Rented Sector. Make home owners feel wealthier and they may ignore the fact that the economy is still on the ropes surviving on the stimulant of quantative easing even if this means you have to inject similar support directly into the housing market to maintain artificial demand.
In the meantime two of the three main political parties have pledged to bring in a mansion tax, Capital Gains Tax will apply to overseas investors from April next year and at some point the Bank of England will wake up and realise that house price inflation in some parts of the country is in double digits as many predict the average for the whole of the UK will be close to 10% this year. When eventually they do they will ask the Chancellor to withdraw the intravenous drip that is Help To Buy – certainly the second version of it at any rate and all of a sudden people will be back to struggling to scrape together high deposits that lenders will once again demand. Finally, the much-trailed ‘Mortgage Market Review‘ will kick in in April this year which will make lenders more cautious about the loans they make – especially those more affordable but ultimately riskier ‘interest only’ mortgages.
Some estate agents are suggesting that property isn’t over-valued, they maintain that there has been a re-rating and in fact today’s prices are the new norm. Perhaps they are right but they don’t seem to be suggesting that prices will continue to rise as they have of late. Some other selling agents in fact predict prices doing little better than keeping up with inflation. Rents seem to have plateaued in many places which to me usually provides a much more immediate indication that we may have got to the peak of ‘affordability’ than sale prices will eventually do. Sales take longer to process, from saving a deposit to finding a loan, sourcing property, agreeing a deal and finally moving in provides an indication of the market 3-6 months earlier. With no wage inflation it would seem that tenants have finally found that they are now spending as much as they can afford on rent and I expect those buying to demonstrate that the feel the same way by the end of the summer.
Yields of 4% (gross) won’t be acceptable for much longer and many investors will wake up and realise that buying for capital gain is actually speculation, not investment. When that happens the adjustment will be quick and most people will only appreciate it after it’s happened.
London is being presented to some international buyers as a black jack table. Many new-build properties aren’t investments at all – they are bets. Some will win but we all know that most will loose. £1m flats in the wilder parts of East London as an investment is like mistaking Presecco for Champagne!
39,000 new flats are to be built in the so-called ‘Embassy quarter’ south of the river in London, many will be shrink-wrapped and left empty while their owners 6000 miles away wait for the roulette wheel to stop spinning.
I think the two biggest threats to house prices remain political interference (the introduction of rapacious taxes as mentioned above) and public disorder. We saw in the riots of two summers ago that the gap between those who own property and those who don’t is now much more than just financial. In pubs outside the M25 and in many within I hear serious resentment at the perceived inequity of housing in this country. Hopefully people will solve this politically but you’ve got to admit that there is little evidence of this being a viable solution so far.
Continuing to rise through 2014.
Plateauing in 2015.
Falling back in 2016 – perhaps by as much as 25% as the stimulants are removed and buyers hit ‘cold-turkey’.
As I have said, your view is just as relevant as mine. What do you think?