In 2008 I wrote an article for T2W entitled: Housing Boom – is the party over? in which I categorically stated that I expected house prices to fall substantially and that investors should look to invest in the stock market from 2008 onwards. I was right on both counts. House prices in some areas have dropped as much as 25%, while the average stock market index has nearly doubled.
After a decade long boom due to lower interest rates and easy lending, the party finally came to a sticky end for U.K. property prices in 2009. According to Land Registry, property prices in the U.K. rose by an astronomical 200% in a decade.
Five years on, I find it difficult to make a case for increases in house prices in the U.K. based on numerous factors. To start with, the major U.K. banks are effectively owned by the governments, and they are not much more secure now than they were a few years ago. In addition to that, to balance the books, we have had the austerity measures and cut in benefits which could affect general confidence levels.
Admittedly, in 2008 I was expecting a much bigger fall than what we have seen so far! Housing prices in the U.K. have been propped up by the following measures:
- Low interest rates meaning that many are able to afford the monthly repayments despite decreases in overall household incomes.
- Low rates are keeping ‘forced sellers’ to a minimum as, despite the recession, we have not seen big jumps in repossessions – unlike in previous recessions.
- There has been an increase in house buying under shared equity schemes.
- Government mortgage guarantee schemes have helped to boost the housing market.
- The Euro zone crisis has meant that many wealthy foreigners have been buying homes in the U.K.
So, what are the big stumbling blocks preventing the property market from increasing substantially from now on?
- A crackdown on interest only mortgages.
- A requirement for higher deposits.
- Austerity measures, which could lead to uncertainty in the markets, as well as fear within households, resulting in them not wanting not to spend.
- Potential increases in unemployment.
- The Euro zone crisis.
In addition to the above, the number of Buy to Let mortgages has been gradually increasing as landlords are cashing in on rising rental income, as well as no sign of mortgage rates increasing in the near future. The low interest rates over the last few years has meant that Buy to Let investors have made substantial profits, many to the tune of millions of pounds, as they snap up properties coming into the market at the expense of first time buyers.
What is ironic is that the government is helping these investors by way of low interest rates, and then also paying them a good return in the form of rents via housing benefit payments to tenants. The current cost of housing benefits to the government is well over £20 billion each year. Local councils simply have no houses left in their portfolio!
Some of the blunders of past government policies, both Conservative and Labour, include selling off gold reserves when it was around $200 and also selling council houses at ridiculously low prices. This has meant that the government has incurred substantial losses from the sale of these assets. Housing is the biggest loss, both in terms of not having those assets on the balance sheets (there were many instances of people buying homes at, say, £30,000 and now these houses are worth over £500,000), and now having to pay substantial amounts in housing benefits!
Despite the fall in house prices in the past 5 years and slow increase in salaries, there is still a mismatch between earnings and house prices and the government is simply not doing enough for first time buyers.
As mentioned before, Buy to Let investors have replaced first time buyers as they are snapping up the properties which come to the market, but for how long? Interest rates cannot remain at these levels and, despite the current economic problems, the move can only be up in the years to come. And, if the rental yields do not keep pace with cost increases, then we can expect a big crash, as there will be major panic amongst Buy to Let investors, many of whom are sitting on big portfolios.
To kick-start the housing market, we need to see an influx of first time buyers, and for that to happen we need to see a fall of at least another 15% in house prices. However, given the extent of the government intervention in the market to prop up the prices, it can be difficult to predict when the next fall will occur.
My opinion on the housing market is do not be fooled. After some stability this year and in 2014, prices are likely to increase, maybe even to double digits. But from 2015/16 onwards, I believe house prices will fall again, and I would not be at all surprised if we see a recession from 2020 onwards.
Governments cannot prop up prices for long, Quantitative easing (QE) has to end some day. So, what will happen when the money taps are turned off without a booming economy in place with low unemployment levels? All they are doing is delaying the inevitable. Eventually, market forces will take over and the landing will be very hard! Very hard indeed!
So be warned!
Jay Lakhani can be contacted at 4x4u.net