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.

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