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House prices - where next?

I’ve just come back again from my travels.

Iceland and New York. A ‘bit’ of a contrast in everyway.  The former; full of beautiful slim, stylish people parading their ‘kookie’ Icelandic woollen style in Arctic winds.  A sultry New York, inhabited by every type of American, united by a misplaced belief that the USA is still the best.  In my humble opinion, big isn’t best and comfort clothing doesn’t pass as ‘street style’!
Still both are great places.  As in all the countries I travel I couldn’t help but check out the local property markets. Each country has had an almighty property boom and crash in much the same way as we have in the UK.

Prices in Iceland have fallen back from their peak in 2007 as those in the US and the UK have and just as in the UK; there has been a tentative recovery.   The latest figures however emanating out of the US just highlight how fragile the recovery continues to be.

Key factors

This is the first ever global house price boom and bust, and what it does highlight above all else is the fact that property values are purely a function of other economic factors.  There is no God given law that house prices will always go up over time.  Look at Germany and Japan for examples of that.

Germany one of the worlds great economic powerhouses, continues to shun the idea that lending and borrowing large amounts of money against the value of residential property is necessary a good idea.  As a result they have neatly sidestepped the boom and bust that property obsessed countries such as the UK, and look who’s laughing now. 

The last boom and bust has highlighted just how much of house price inflation is down to credit.  When lenders such as Northern Rock were giving 1st time buyers 125% mortgages was it any wonder prices went up.  If the banks can’t or won’t lend prices are not going anywhere.

The other factor that is important is standard of living.  Growing incomes give people the money to finance the loans and more importantly confidence to borrow and the banks to lend.

Temporary fix

Interest rates in the US and the UK are on the floor and that has helped plug the affordability issue in the short term whilst the banks fix their balance sheets.  Policy makers and governments have managed to avoid a house price crash of epic proportions that would have dragged the global economy even further into the mire.  The reality is that this will only prolong the pain to any sustainable growth in housing values as the fundamental mismatch between lending and incomes unwind.
Anybody who doubts the fact that houses are still not cheap just needs to check out the government figures.
 

In 1997 the average price to earnings ratio in England was 3.54, it peaked in 2007 at 7.23 and then fell back a little, but by 2010 it was still just over 7.  Even with low interest rates how sustainable is this massive increase?  Are we really twice as well off now as we were in 1997…..I doubt it!

Income stagnation

With public sector wage increases in the UK on hold, and inflation rampaging away, it’s hard to see how the conditions for house price growth in the near term will emerge.  The danger in the medium term is that flat or falling prices will dent the aspirations of buyers wanting to get their foot on the housing ladder.  The good news for UK landlords is that whilst there is an increasing army of renters; at our heart we are still a nation of aspirant homeowners.
This should fundamentally underpin house prices in the long term.

The future

I’m neither a house price bear or bull, in the short term although some experts do see a period of weakness, which would not surprise me. I do see a rather dull period for property values unless you operate in the few property hotspots in London and some of the Teflon towns such as Harrogate or Bath. 

For most of us landlords who made serious money during the last boom it was all about timing.  Buying  before the jump in general house price rises across the country.  There’s no doubt money can still be made from property where landlords have a development angle or can buy at auction or where they are investing for cashflow.

I would however be cautious about just leaping in and buying and holding at the present time.  Without the existence of a driver for house price growth, why hold more property in your investment portfolio when shares or bonds offer greater returns with less management implications.


The secret for any good investment is timing and patience.
 

Landlords may take the view that patience is a virtue and use their time and their savings to take another holiday instead of adding to their property portfolio just yet.

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