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Have I missed the boat?

Long-term house price forecasts

Prospective property investors thinking of dipping their toes into the residential property market, or those landlords looking to expand their portfolios might be asking; have I missed the boat? Well, as property prices surge to a record high, here are my thoughts on the residential property market and house prices in general. Feel free to agree, disagree or offer your view.

Property investment is a game of 2 halves

Anybody investing in prime residential property markets such as London, with its booming rents and soaring prices must be thinking – “What’s a down turn?” despite the slow down in luxury house price growth.

As for us mortal landlords who have invested out in the regions, outside of a few Teflon towns such as: Harrogate and Bath, must be thinking – “What house price recovery?”

It really is a nation of two halves.

London and the south east have secured fantastic price increases, much of it propelled by international money. The political, social and economic uncertainty across the world (witness Egypt, Libya, China, Russia) has thrown the international rich onto safe havens such a London. To a degree the same thing has happened domestically with the Teflon towns. Blue chip UK residential owners have sunk their cash into prime property locations. Whereas, ‘the rest of us’, owning property in “real Property UK” have been left tied to the vagaries of UK buyers and a restrictive mortgage market – hence the market has remained pretty depressed.

Mini residential property hotspots

What is interesting is that within all our towns, cities and regions there are mini property hotspots where certain localities have massively outperformed the average in the areas.  These mini property hotspots often correspond with family housing in the catchment of the best schools as middle class parents out bid each other to get junior into the best schools.  I can’t see this trend changing any time soon.

Future property price prospects

Okay the market in the rest of the UK is starting to move. The Help to Buy Scheme appears to be doing what was intended, restoring confidence in first time buyers, to “have their own home”. This looks to be encouraging for house values in the short term. We know why the government are investing so much into kick starting the housing market – the economy is dependent on this shot of confidence, nothing lifts the bank’s balance sheets (of which we or the government are a massive shareholder) more than a growing property market.

Are property prices cheap?

We can see from house price graphs that typical property prices stalled or fell from the boom times. In many areas they are down by a good 20% in real terms, judging by the Nationwide data.  Despite recoveries in many areas average house prices are still below the real value achieved in the final quarter of 2007.

A fall doesn’t necessarily make them cheap though. In terms of income multiples, first time buyers are currently looking at a 4.4 average earning compared to just over 2 at a low point at the end of 1995. Unless we are expecting average earnings to surge house prices are not actually looking very cheap.

The other factor that has a large baring on property prices is the replacement cost of building new property. There is demand for more homes. Increasing birth rates and a desire for people to live alone means there is strong demand.

Building more housing – costs

The build costs for an average property excluding land is likely to be about £1000 per sq m. In other words, a two bed flat will cost about £70-80k to put up. That’s without factoring in the land and site costs. Scarcer and scarcer resources mean that this cost can only go up. With Green Belt policies likely to stay tight and the controls over land supply largely in the hands of a few developers, it will mean that development land prices will continue to stay high. The reality is that if we want to build more residential property we won’t be able to do it at below current market values. If property prices stall; so will new housing development. The housing crisis will become an absolute disaster, no government can afford this to happen.

Affordability – the 64 million dollar question

Landlords have been dining out on impossibly low interest rates and growing rents for best part of half a decade (no complaints from here). This isn’t going to last for ever. Interest rates will increase to a more realistic long-term level. Say 5-6 %. At this level rental profits will start disappearing for many landlords which might bring back the focus on gaining profit from capital gains.

So will property price rises deliver?

This in many ways is the 64 million dollar question, so here’s my guess. The UK loves property. As long as people have money and access to finance we will keep on buying property. It is more than just an investment. For most people it probably has the biggest impact on their quality of life, bar none – so why not pay as much as they can afford for it. However, if we believe that big income/wage rises are over, and that Government will be keeping a cap on inflation, then at some stage property prices will have to reflect the reality of UK income and wealth.

House prices are still relatively expensive, despite recent falls, they should come down. In my view this will cap real time house price rises for decades to come. In 1993 it was very different. I felt confident to stake every thing I had on property prices going up. I was right, but it really was a no brainer. Now I am much, much, less certain.

I feel that house prices could drift sideways for decades, whilst successive Governments try and massage the faltering economy back to life. For landlords and property investors this means that might be forced to eek out returns through small rental profits and relatively small increases in values. It’s really going to be several decades of re-balancing incomes and house price values. This time I won’t be betting my house on the prospects of the UK housing market.

However – history proves me wrong!

One thing that I have learned in 25 years of investing in the UK housing market is that don’t write off the UK housing market.  Back in 2004 Kate Barker conducted an extensive study and report into Housing Supply and the subsequent impact on the long-term price of housing.  She concluded in the Barker Review that under supply of housing was resulting in a long-term upward trend in house prices above the rate of inflation of 2.4%.  Doesn’t sound much does it!  However, if you look at the impact of that growth over say 20 years ( say the average time a landlord holds their residential investment for) it will mean that a £100,000 property will have shown a £60,000 increase above the rate of inflation by the end of the property holding period.

Property and particularly residential property is a bit of a drug for the British phsyce.  When we are scared or unsure about the future we tend to invest in something that we know and understand by ….investing in residential property.  When we are positive and exhuberent during boom time we tend to want to demonstrate our financial success and enhance our lifestyle by…..investing in residential property.  This possibly helps to explain as much as anything why UK residential property prices over the long-term continue to confound the doomsayers and sceptics.

Have I missed the boat?

The short-term answer is no … but. Not the clearest answer I know. I would be cautious on London property; it is getting toppy, but if you believe the globalisation story will see the international rich getting exponentially richer then property prices could go to obscene levels. The rest of the UK however, is going to depend on much more mundane issues, such as growth in the economy, and off course economic confidence.

The reality is, the heady days of the property investing late nineties and early noughties will not be returning in the next couple of decades. Investors contemplating buying now should see property as a safe place to save their cash, aided of course by a nice bit of rental income. Those investors hoping to see a dramatic shifts upwards in capital values might be disappointed. There are still risks in my view are still to the downside. But hey, this view will never be popular with the headline writers. They are only interested in talking about a housing booms or busts.

Post your views on the prospects for residential property investment.

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