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Property prices about to boom?

Most of us ‘hard bitten’ landlords get fed up with the endless splurge of meaningless headlines thrown out by PR companies on behalf of estate agents or scurrilous BMV property companies. They hail an unquestioning sound bite claiming that house prices are about to boom!

Despite my ‘deep seated’ scepticism, there are definite signs emerging that UK property prices may be picking up. Latest figures from the Halifax indicate that recent house prices ticked up in April, and recent reports from LSL Property Services show that prices are up by  £6726 over the last year.



Where are we now?

House price booms and crashes do tend to follow a pattern.  A classic boom in asset prices normally follows an exponential curve upwards, followed by a dramatic correction, as reality dawns that prices can't rise inexorably, with factors such as a ‘credit boom’, it is suddenly curtailed.

It’s useful to see this in graph form.

Are house prices cheap?

Looking at a long-term trend real growth rate in house prices of 2.9%, UK house prices have now dropped below their long-term trend line.  This could suggest that they are now cheap. However, this is very different to being on the edge of a boom. We have historically seen following on from a boom there can be a sustained period where prices fall below trend for a good number of years. Given the scale of the last house price boom; let’s not forget it was a ‘hell of a party’.

Let’s be real….houses are still not cheap, by many measures. If you are first time buyer you are still looking at paying over 4 times your salary (above the long term average of 3.5 ) and way above the low point of 2 times hit after the last crash in 1993. 

However other factors have changed. First Time Buyers are no longer the only prime movers in propelling the housing market.  Landlords now hold far more sway in the residential property market than they ever did before.  This means that affordability is as much about the metrics of yield to mortgage costs as it is to multiples of average income. With landlords being able to borrow up to 85% and with APRs less than 5% and with double digit rental yields available; affordability for many landlords is not an issue.


Factors that might now cause a boom.

1. Cheap money.

Interest rates are on the floor and borrowing money is phenomenally cheap …if you can get your hands on a buy-to-let loan.

This all means that the primary scenario for a boom in prices is in place.

2. Government policy to stimulate the housing market

The Government aren’t stupid.  They realise that any economic recovery is dependent on a healthy stable and preferably growing housing market. The wealth tied up in the housing market also stimulates the wider economy by directly effecting wealth and consumer confidence.  In contrast a house price crash is a disaster for the economy.  Most government action following on from the financial crash was aimed at propping up the housing market.  The latest action aims to stimulate the housing market to ensure confidence returns.

You only have to look at the US market to see how a recovery in the housing market is inexorably linked with that of the economy.

In some ways the government have already been successful if reports in the Telegraph are correct.  A mere 8% of people now expect homes in their areas to drop in value over the next year.

The flip side to this would be an economy such as Japan, where the failure to reflate the property market has been associated with a lost generation in economic growth.

3. The British love affair with property

The UK is in love with property ownership.  We love the thought of getting rich whilst living in our biggest investment.  In tough times we justify our love of property by the fact it’s value has fallen less than our other investments.  Good or bad the Brits love their property. Either way it kind of makes sense historically to stick your money into residential property, especially if you are prepared to take the longer-term view.  This is exactly what most landlords aim to do.

Property Hawks view

Are house prices at the bottom of the current cycle?

Well probably, although we could still have another year or more of them bouncing along at the bottom. 

Are house prices about to boom?

Probably not. Historic metrics indicate that they are still not screamingly cheap, although there is an outside chance that all this monetary easing could light the house price touch paper.

Will house prices keep going up over the long-term?

Probably, but a glance at the Japanese model shows this is not guaranteed.
What we can say is anybody who tells you that they know exactly what is really going on in this crazy post crash recovery phase is most definitely either:
a.  Stupid.
b. Trying to make money out of you.

If you have thoughts on the future direction of house prices and whether landlords should be investing right now - Please post below.

Landlord insurance - portfolio rates available



Comments (7)

property boom
I think property prices will increase due to supply and demand
There's been very few new homes built over the last five years
So perhaps this will fuel the property boom
#1 - Mark - 05/17/2013 - 16:12
The Bottom of the Market
If history is anything to go by, I reckon that each crash and recovery cycle is bigger than the previous ones, I think roughly by 42%.

If this is correct, I would estimate that the bottom of the market will be about 8.5 years after the 2007 peak. So mid 2015.

Also, I reckon that the same may be true for the curve up to the next peak from the bottom, so my estimate for the next peak would be about 15.5 years from mid 2015 (estimated bottom), making the next peak at about 2031.

This period 2007 to 2031 would also correlate with the previous peak to peak period 1990 to 2007, i.e. a 42% increase in the previous peak to peak period.
#2 - Brian Abbott - 05/17/2013 - 16:15
WE are going nowhere fast
I think property outside london will just bump along for a long time to come
this is no normal correction

For BTL its a great time long may it last another 5 years at this leval will do nicely thank you
#3 - dislexic landlord - 05/17/2013 - 17:02
Property Price Deception!
The fact that we are the most indebt country in the world after Japan, and we have had our AAA rating cut twice in as many years means to me that we are living in a false economy.

The last time a European country was in as much debt as we are, there was a world war because of it? The house prices in Britain are being artificially propped up by the most deceptive government in the western world, relying on quantitive easing to deceive the "man in the street" that all is well and there really isn't a fiscal problem with our econnomy? They are therefore keeping interest rates at an incredibly low status for an incredibly long time to prop up house prices. First time buyers are finding it very difficult to get mortgages because the banks are "Scared" to lend without huge deposits and concrete guarentees. This has prevented a house price boom in recent times, thankfully.

I remember interest rates at 10% in 1989 just before they rose overnight to 15%. This crippled ALL mortgage payers and people were walking into their lenders, banks and building societies, to hand back their house keys and walking away! This caused a 6 year house price slump. Then there was a house price boom for ten years. However the circumstances now are far different from then.

The truth is that we are all in for a massive shock. sooner or later, don't know when, but interest rates will again rise. Thankfully we should hopefully not see the rapid hike as in 89/90 but it is inevitable they will rise. It will only take a maximum though of 2% rise before we find ourselves in the same position as we did in 89. However, this will not be a quick suicide but a slower, but just as painful, house market death, say 0.25% rises monthly or bimonthly perhaps? This will create severe pain and poverty for all mortgage payers over a period of time. This will lead to a slow passage of re-possessions and eventually a house price CRASH.

All doom and gloom in my humble opinion, but because we are all being deceived by our fiscal godfathers, we seem to accept that it really isn't that bad, UNTIL it's too late. I sincerelt hope I'm wrong but the storm clouds are gathering over our whole econommy.

Still it could be worse, Nigel Farage could be prime minister lol.
#4 - George - 05/17/2013 - 18:37
I live in Oxford and it seems like we have already seen bottom prices. The houses that were at ~£230K a couple of years are now on sale for ~£290K..
#5 - Dr Jamshed Khan - 05/17/2013 - 20:48
House Prices
There is already shortage of rented properties all over the country. I live in North Lincolnshire where the rental market is quite healthy in comparison with other area in the North. Price have rising steadly over the last 12 months. Are we to accomodate the new infulx of Romanian and Bulgarian than demand will exceed supply. I am looking forward to the new EU members arriving at our shores and looking for accomodation.LOL.
#6 - Afzal Khan - 05/17/2013 - 22:05
Realestate price cycles
I direct you to the study by Phillip J Anderson www.businesscycles.biz . There is nothing new under the sun, its all happened before, its just that we have short memories.
Property prices will increase, the establishment will make shure they do. They have to much to loose if they dont.

Roy
International property investor
#7 - Roy - 05/18/2013 - 02:15
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