For those teetering on the edge of a property purchase there can be little
comfort in the collective suspicion that house prices can’t carry on forever
upwards. That the Royal Institution of Chartered Surveyors, Halifax and
Nationwide are now reporting faltering demand is increasing the nervous
reflections — of first-time buyers, second-home owners and even buy-to-let
investors — on the horrible freefall of property prices at the end of the
1980s.
But the BBC’s economics editor and the brotherly host of the BBC Two’s Dragons’
Den, Evan Davis, has concluded that homes remain a sound investment.
After examining UK property for a Radio 4 series, The Price of Property,
he believes that even though average house prices have risen 199 per cent in
a decade (according to the Halifax), property is still a good home for your
money.
Davis, author of a blog, Evanomics, which includes a spirited defence of the
Olympics budget, thinks that demand will slacken. The first retreat, he
predicts, will be from modish investors in buy-to-let (and buy-to-sit, in
which owners want only capital gains and need not fill their properties with
tenants). These buyers, who often compete directly with beleaguered
first-time buyers, have been seduced by the prospect of capital gains and
have piled in without thought for surviving the current market cycle of
lessening capital appreciation and higher costs.
This might bode ill for continued higher prices, but Davis maintains that
significant, healthier, demand will remain. The flood of foreign buyers into
the UK continues to bolster the market in London. Yet overseas capital is
tentatively relocating to the more picturesque of regional areas. This
foreign cash is, he says, a more stable presence in the UK market, motivated
as it is mainly by the purchase of a home as a home, rather than as a
creator of profit.
Davis, who reminds us that property is historially cheap because of low
mortgage rates, says: “The investment demand for houses and second homes and
for buy-to-let properties is a thing that swings the market up and down, but
doesn’t fundamentally affect whether we want a second home to go to at the
weekend.
“The current level of prices has been underpinned by the desire of other
people simply to make money out of housing. There is good chance they will
be disappointed in how much money they do make and then when they sell there
will be bigger supply of housing for everybody else.”
The most surprisingly contention of the series is that a price fall might be
just what many homeowners need. Indeed, many would find themselves better
off: it is the buyers most obsessed with houses and prices — the young and
upwardly mobile — who are worst affected by rising prices. True, it is
better to be a home owner to take advantage of any capital gains, but any
profits made will inevitably be needed for the next, ever less reachable,
property. And Davis explains: “If you are upwardly mobile and you own only
one property you should want prices to go down, not up. I would happily sell
my flat for 50p if I could then buy Buckingham Palace for five quid.”
It is those trading down, to smaller homes or cheaper markets, who are free to
applaud rising prices. He says: “It’s the downwardly mobile, people like my
parents, who benefit. The paradox of the situation is that what do my
parents have to do with the capital gain they have made on their house but
help the likes of me to buy a property by using some of their equity.”
Those nervous buyers should take heart that even right now is a good time to
commit. There is the comfort in knowing that house prices have risen on
average by 2.7 per cent a year, not including inflation, since 1950, even
during decades of busy housebuilding. This is not the handsome figure some
might want, but Davis does say that house prices do double every 12 years or
so. He explains: “If the speculative froth flowed away and house prices fell
back you would expect them still to be quite high by international
standards. A crash might make property cheaper but it won’t make it cheap.
“The reason to buy now is to gain a home and to be able to stop worrying about
house prices. Once you’ve got one you can relax. You don’t have to worry
about being priced out of the market because you are locked into the system.”
Davis, a former research fellow at London Business School, was an economist at
the Institute for Fiscal Studies before taking on his BBC role in 2001. In
the final instalment, to be broadcast on Tuesday, he will present his
thoughts on how to encourage building and to improve access. There are, it
seems, no painless solutions.
As the market works it way through its cycle, Davis contends that the appetite
for building will ease supply, assuaging “overconsumption” by some buyers
and allowing some of the have-nots on to the ladder. But he reassures us:
“The problem of supply will never really go away. If our incomes carry on
growing as they have done, with every generation more or less twice as rich
as the previous generation, then you can expect that each generation will
want to live in housing better than the previous one had. When everyone’s a
millionaire, they will all want to live like millionaires do.”
That’s exactly why, price falls this year or a swath of new homes next year,
it’s always worth investing in property.
The final part of The Price of Property can be heard on Radio 4 on
Tuesday at 9am or at www.bbc.co.uk/radio4/listenagain
Erica. If I buy or rent I have to pay the same amount each year in mortgage payments or rent (actually more if I rent) so my figures still work.
No-one knows if prices will rise or fall so I can only go on my own experience which is that if I sold today I would be hundreds of thousands better off than if I had rented. This will still be true even if prices fall 20% and that does not look very likely to me.
Picture might be very different outside central London, but I don't live there and it is not relevant to my local housing market.
Gareth, London,
Many of the benefits of the rises in house prices must be heeded if, like a lot of my first time buyer peers, there is not a substantial deposit on the house.
Prices may have risen 2.7% / year above inflation since 1950, but even if this is guaranteed year on year, this does not make much profit on a house where most of the house is on a mortgage with the current interest rates of 5 - 6%.
Gareth in london take note: if you take out a 5% interest mortgage on 95k of that house, you would have to pay £4750 in interest that year, meaning that only £250 would be gained on the value of the house.
Having said that, a small gain is still more profitable than the 'dead' money renting, and costs will go down providing readers do not take the risky route of taking out an interest only mortgage.
Erica Whalley, Newcastle upon tyne, Tyne and Wear
Richard - you make a very good point about the last house price correction, high inflation hid the real extent of the fall. A fall of 8 or 9% in nominal terms was actually 35% or so in real terms.
The fact that in the past prices have rarely fallen in nominal terms will be irrelevant this time as we have a much lower level of inflation and so we are not inflating our way out of debt as we could in the past. Also we have huge levels of personal debt and the rise of sub-prime lending is worrying.
Add in a good dose of national obsession about the housing market and I would say you potentially have the biggest bubble in property in this country ever. Just think of the people you know who's conversation is all about property investing. It's a harsh point but when the ill informed are discussing their own portfolio of houses you have to realise that there are not many people to follow after them.
I hope that employment remains strong or any house price fall will be severe.
George, london, uk
Re: Leverage. It's is only a good thing if prices only rise. In the example above if the price drops 5% in a year then you loose £2500 - i.e. your loss is maginfied to 50% and your original investment is halved making it a poor investment. If the price dropped 15% over 3 years you would be down £7500 or 150% loss, you would loose more than your original investment - not to mention inflation. And please don't tell me prices will never fall.
Jeff, Edinburgh,
Come on guys, cheer up! I wish I had a house that was in negative equity in the early 90's, it would be worth 3x as much now.
Renting and putting money "saved" in a bank account to outperform the housing market is nonsense. Property is such a good investment because you can leverage; if I put £5k down on a £100K house and it increases by 5% in a year I have made £5k, which is a 100% increase in my investment. If I put the same £5k in a bank account and it pays me 10% a year I have made £500. As property where I live has increased by 30% this year and bank account rates are closer to 5% I would be massively worse off selling and putting the equity in a bank account.
Gareth, London,
We should remember that houses are luxury goods. It is possible to live in a shack, the rest is luxury. As real incomes rise, the demand for essentials (such as food and water) remains fairly constant (at our income levels) but the demand for luxuries rises. In a land where people judge others by their houses (do you know so and so? Yes hasn't s/he got a lovely house?), an attitude reinforced by the hideous expression " getting on the housing ladder", and as long as people feel embarrassed if they do not display the trappings of wealth, people will always want to "climb the ladder"; perceptions of self worth will remain relative.
Rob Slack, London, UK
A relative of mine was burned the last time house prices dropped and him and his family spent 8 years unable to move due to negative equity. Try telling him that 'not having to worry about house prices' was a good reason for him to have bought his first property!
Dave R, London,
Mr.Warner writes: "Davis is wrong - house prices are not "historially cheap because of low mortgage rates" at all. Cheap mortgage rates are linked to low inflation,"
If you look at the older measures of inflation (RPI and RPIX) then interest rates are about 2% less than they would be historically.
Mr. O'Donnell writes:
"Of course, the intelligent ones will just move abroad. Why stay in a country that can't even provide you with a home?"
It is often quite difficult to emigrate to the English speaking ones unless you have in-demand skills, and many European nations currently have relatively high levels of unemployment. Hence moving is not that easy unless you have high skill levels, in which case you may earn enough to buy in the UK anyway. Those with low skills who find it hard to find work in the UK will find it nearly impossible to buy, as was the case historically.
Mr Turner, Warwickshire, UK
Between 1989 and 1994 UK house prices fell by 35% in real terms. High inflation disguised this as a modest fall in nominal prices, but the real effect was to trap hundreds of thousands of homeowners in negative equity. The recent rise in prices is greater than that seen in the 1980s and the current outlook for the global economy, which since 2000 has been propped up by historically cheap debt and excessive consumer spending, is not promising. I strongly suspect that the current "fundamental imbalance" between supply and demand in the housing market will be revealed as somewhat less fundamental when large numbers of people find themselves out of work, bankrupt or both. The last word: recessions always happen, they always will, and the next is long overdue.
Richard, London, UK
If you believe that it makes sense to buy a house now, then I challenge you to do the math. Instead of putting money into buying a house, you can rent and invest the money you save from not having to pay an enormous mortgage payment into other investments. Even if you just invested in a savings account at the bank, then house price appreciation would have to actually increase (increase!) to achieve the assumed capital gain that is already priced into houses for it to make more sense to buy over a 10 year time horizon. And this holds true even including the tax advantages of buying and assuming that rents increase above the rate of inflation (which they haven't been doing in the past few years). Even if house prices don't go down, because you currently have to pay so much more for a mortgage vs. renting (at least double if you look at current rental yields on buy-to-let properties) then you actually lose money if house price growth rates moderate or even stay where they are.
RichB, London,
If house prices continue rising at their current rate, the young people of this country will soon have to face the reality that they will never own their own home. What a wonderful legacy this government has provided!
Of course, the intelligent ones will just move abroad. Why stay in a country that can't even provide you with a home?
Matt O'Donnell, London, UK
Davis is wrong - house prices are not "historially cheap because of low mortgage rates" at all. Cheap mortgage rates are linked to low inflation, and solely mean that 1st year monthly payments are currently more affordable than previous peaks. It's an illusion in the long term. Low inflation means that the debt lingers longer. In later years buyers will pay MUCH more than any other generation. The rungs of the property ladder move further apart, and very few gain. The social implications of this boom are very rarely considered. Say goodbye to a meritocracy for starters. Wealth today is defined solely by when you bought, and what your parents can give you. Such a shame. Such a shame.
Matt Warner, London,
Prices of houses or gold or anything else may go in cycles, and usually do, though we might venture the opinion that in this particular house-price cycle the chain is broken and we have started freewheeling down the hill. No doubt the brakes have been ajudiciously applied at steep bends without stopping our fun.
Piggy Kruger, Bridgwater, UK