Property Investing in 2010
Mirror mirror on the wall are house prices going to fall……
Read on to discover our fool proof method for predicting the level of house prices over the coming 12 months….
The year so far
This year has not seen the carnage in house prices that many were predicting. Looks like old Gordon’s emergency measures of pumping liquidity and the Bank of England putting interest rates on the floor have stalled a more serious correction. This is only because the Government and the policy makers have thrown everything bar the kitchen sink at the capital market to prevent asset deflation on a Japanese scale and the negative feedback of a fully fledged depression. We only have to look at the size of the UK’s budget deficit for evidence of this.
However, landlords who may feel that we are out of the woods and are ready to put their foot to the floor on a buying frenzy should take a moment to think.
Asking prices for properties have fallen this month by 2.2% over November, although they have ended up 1.7% over the year, according to Rightmove.
The long term trend in house prices provided by the Nationwide shows that house price after dipping strongly from their peak of £189,316 in 2007 have stabilized just above trend after 7 months of rising prices.
Reasons for stabilizing property prices
The apparent recovery in house prices as resulted from several largely unsustainable factors:
1. Restricted supply. Many potential sellers have deserted the market choosing instead to let and become ‘accidental landlords’. The result is restricted supply has forced up prices as buyers are forced to compete for the few properties available.
2. Historic low interest rates. Rates at historic low rates mean that anybody on an interest rate related loans are generally paying practically nothing, unless they have a repayment mortgage. This ain’t going to last. Wait for rates to rise.
3. Buyers perception. We all have incredibly short memories. House prices look cheap now compared to a couple of years ago so many buyers including landlords are convinced they are getting a bargain. House prices only go up right?!
Prices are still not cheap when you compare prices to 5 years ago. This indeed was a time when the banks weren’t bust; we had a growing economy and low and falling unemployment. Cheap and expensive are relative concepts and house buyers and property investors sometimes conveniently narrow their points of reference!
My gut feeling is that prices are still too expensive!
It’s a gut feeling. When I trawl back and see what house prices were only 7 years ago before the big boom I think house prices are still far from cheap. Remember back then we had far less debt and most importantly a whole load of lenders dead keen to lend!
Latest figures revealed by the FT indicate that despite a 20% fall from their peak house prices have risen by 91% over the decade whilst average incomes are up only 40%. Even if prices were undervalued when they started rising; this mismatch between underlying incomes cannot be sustained. It was largely a function of the easy credit which led to the credit crunch and this has now dried up.
Now we have a whole load of debt, rising unemployment and an economy which is still in depression. We also have a whole load of lenders who can’t or are scared to lend and who have been doing everything they can to keep people in their homes and prevent mass repossessions.
Lessons from history
This house price boom has been remarkably predictable. It has followed a classic asset bubble in its route to boom and then bust. In most asset bubbles prices sink below the long term trend as investors stung by their losses avoid investments until they are really cheap. This is the stage we have not gone through. Maybe the Governments corrective actions will take some sting out of this leg of the asset bubble correction. However, in my view we still have further to fall until houses are a clear buy.
I still say that the Summer of 2012 will be a good time for long-term value to start to emerge.
Until then, I feel: rising unemployment, increasing supply and rising interest rates, low levels of mortgage supply will all weigh on prices causing them to track lower, unless of course you invest in a Teflon Town.
This doesn’t mean that there aren’t reasons to buy. Property always throws up investment opportunities even during the toughest times. Property investors need to follow the principles of doing their research and not being tempted to over pay. Landlords should go for value not numbers in the current climate. If they can’t get a good deal then it’s probably better to keep your “powder dry”.
If all this analysis gets too much. Then why not try our fail safe option for projecting future house prices by pinning the tail on the house price donkey.
Never say we don’t give you the most informed analysis and the best advice.
For more house price predictions see the links below or follow our regular house price twitter. Have a great Xmas and good luck for the New Year from the Property Hawk team.