Article

What Next for U.K. House Prices?

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:

  1. Low interest rates meaning that many are able to afford the monthly repayments despite decreases in overall household incomes.
  2. 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.
  3. There has been an increase in house buying under shared equity schemes.
  4. Government mortgage guarantee schemes have helped to boost the housing market.
  5. 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?

  1. A crackdown on interest only mortgages.
  2. A requirement for higher deposits.
  3. Austerity measures, which could lead to uncertainty in the markets, as well as fear within households, resulting in them not wanting not to spend.
  4. Potential increases in unemployment.
  5. 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

Jay Lakhani is a professional trader and has been involved with the markets since his early twenties. He is also the author of a book entitled: ‘Forex Mastery a Child’s Play’ which is a 307 page paperback outlining simple trading strategies and focuses on trader psychology. Jay also runs a live trading room, where traders are able to watch over his shoulders and see what he is trading.

Jan 8, 2011
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#2
Help to buy

Interesting article, do you think help to buy will increase the boom and bust situation, e.g when (if) it is withdrawn from the housing market....
 

timsk

Well-known member
Mar 18, 2002
6,793
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#3
Just a 'heads up' post . . .
This article is a follow up article to one T2W published 5 years ago by Jay Lakhani entitled UK Housing Boom - Is the Party Over? That article received a lot of interest and the associated discussion thread continues to bubble away to this day with over 500 posts. So, anyone interested in the original article (regardless of whether you agreed or disagreed with it), might find the follow up piece equally thought provoking.
Tim.
 
Aug 5, 2013
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#4
with the Govt interference, Highly unlikely we should see a drop in the prices, which is sad as many first time buyers have simply given up hope! What you are seeing is MADNESS, the prices were dropping steadily, but as soon as the stupid government comes up with scheme to "help buyers" immediately in some areas the prices went up by +10%
My view is don't mess about with the markets! let it crash!
 

dealer911

Active member
Nov 6, 2009
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#5
with the Govt interference, Highly unlikely we should see a drop in the prices, which is sad as many first time buyers have simply given up hope! What you are seeing is MADNESS, the prices were dropping steadily, but as soon as the stupid government comes up with scheme to "help buyers" immediately in some areas the prices went up by +10%
My view is don't mess about with the markets! let it crash!
I must admit I dont really understand this assumption that everyone should have the right to buy their own home - where did this "right" come from ?
 
Oct 24, 2013
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#6
House prices fell a few percent and the Government turned on the printing presses to pour billions of pounds into the housing market to create a bubble. Things are heating up, It'll all end in tears, and probably bankruptcy for Britain, since now its the poor old taxpayer guaranteeing all these subprime mortgages that Cameron is obsessed with creating.

Houses in general are big Joke, even if the immigration is solved and property are released when it comes to quality UK is pathetic. It appears that houses and apartments in central london is a salvation place 1 bed room price 1 million; and the walls are not even worth 5 strong kicks. UK looted many countries invaded without permission but when it comes to their own house keeping they proved they are British
 
Aug 5, 2013
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#7
Arab and Russian money is helping the London property market. was talking to an upmarket estate agent, and he says 50%+ buyers has been from the Arab world!

UK will become the first non-Muslim country to issue an Islamic bond, and there are plans for a new Islamic index on the London Stock Exchange. This will further increase the inflow of oil money into UK, thus driving prices up.

Sheer madness!
 

NVP

Well-known member
Jun 21, 2004
35,842
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west sussex, UK
fxcorrelator.com
#8
interesting piece ..........but like most articles it treats the housing market as 1 sector when in truth it is a multitude of different sectors and segments with different weightings on the drivers mentioned

hence you cannot truly say that the market did this ........also the generally approved measures regarding valuation are all flawed as well - mainly lagging andf some sadly lacking in data or integrity


the following serments have vastly differing performance and dynamics....

1) Area (eg Aberdeen > London)

2) property type (1 bed flat > 6 bed house > 70 acre Estate)

3) Residential vs Commercial

4) Owner domiciled vs Let

Specialisation is key if you are looking to make money or just predict future performance

NVP
 

Atilla

Well-known member
Nov 15, 2006
18,269
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#9
Supply and Demand

Points raised are factors yes but the lack of any reflection on the Supply of housing stock and the Demand for accommodation coupled with popullation demographics renders this article not very accurate assessment of future property prices.
 

WR1

Active member
Mar 22, 2012
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#10
it would help if every government did n't continue Maggies vote bribe
why on earth (apart from a vote winner) do people have the right to buy a council house on the cheap and then sell it in the boom
this has depleted supply and not exactly rocket science to see it might be a problem

a bubble is already being talked about in London as Londoners and many rich non doms are buying up anything

when interest rates eventually go up, some are in for a nasty surprise
and the Tories won't look quite so clever, not even to Sun and Mail readers

the market should of been allowed to correct and then would nt be such a problem when the rates go up as Houses would be cheaper in the first place

but no-one will complain while the prices go up, least of all Sarah Beeny and such like
until the next crash, but this time it will be the Tories fault again
 

Liquid validity

Well-known member
Sep 19, 2010
2,422
692
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#11
Points raised are factors yes but the lack of any reflection on the Supply of housing stock and the Demand for accommodation coupled with popullation demographics renders this article not very accurate assessment of future property prices.
Doesn't matter how high demand gets if no one can afford to consume
the limited supply.
So Buy to let landlords step in, rents rise to cover mortgages in the event
of rate rises (unless you assume rates are stuck where they are for all eternity)
BTL stock is then voluntarily or forcibly put back into market as supply at a lower price.

The only thing that will stop house prices falling in the long term
(once gov.t intervention ends) are wages increasing to reduce the high
income multiples.
Currently we have wage deflation due to no or low wage rises that don't
keep track of manipulated inflation figures.
So currently unless there are strong signs of any of that changing,
the outcome painted in this article looks ok to me.

London is an entirely separate case, as real estate there has been a safe haven
for foreign cash for quite some time now, still hard to see how that won't turn
into a bubble, if it isn't already.
 

Atilla

Well-known member
Nov 15, 2006
18,269
2,528
323
#13
Doesn't matter how high demand gets if no one can afford to consume
the limited supply.
So Buy to let landlords step in, rents rise to cover mortgages in the event
of rate rises (unless you assume rates are stuck where they are for all eternity)
BTL stock is then voluntarily or forcibly put back into market as supply at a lower price.

The only thing that will stop house prices falling in the long term
(once gov.t intervention ends) are wages increasing to reduce the high
income multiples.
Currently we have wage deflation due to no or low wage rises that don't
keep track of manipulated inflation figures.
So currently unless there are strong signs of any of that changing,
the outcome painted in this article looks ok to me.

London is an entirely separate case, as real estate there has been a safe haven
for foreign cash for quite some time now, still hard to see how that won't turn
into a bubble, if it isn't already.
Demand and rising prices does matter as it will stimulate increase in supply with builders chasing profits.

As mentioned if UK residents can't afford prices then foreign money coming in can. UK citizens will move out of London & SE to more affordable areas.

Before the crises some were talking about 50% falls and more with housing in the doldrums for years. House prices have been sticky downwards and 5 years is a reasonable period for stagnation.

My personal experiences is very positive and I still hold the view there is much money sloshing about in the system with even more coming in from; the Chinese millionaires, Russian billionaires and now rich & French tax dodgers.

My new colleague at work who has moved from Milan to London and is already looking to buy with a 2-bed with a budget of 500K.

I have heard of an Afghan man with multiple wives and properties in London and Italy. He offered to buy a friends freehold property approx 800K in cash. I hear money is coming in from really all directions.

Another firend is buying property in Exeter to rent to students. She currently has a house in Richmond.

Now I am one average citizen, labourer, working class, peasant :cheesy: and I see and hear all these stories around me. I hazard a guess as to what kind of deals the rich and well connected are conducting. :cool:

With respect to the housing stock, 1/3 of UK property is in flood plains. More people living in single households and going through divorce. This trend is likely to continue increasing demand for more homes. Won't mention immigration.

My solution would be to loosen up greenbelt rules and permitted developments and allow individuals to build their eco-friendly, off-grid, energy efficient homes. Stimulate the green industry and re-generate the country-side whilst improving quality of peoples lives.

However, as many vested interests lie in the pockets of politicians I doubt this will be an option for some time to come.

I re-iterate no matter what anyone thinks without looking at the number of houses and population growth, one is not realistic in their reflection of house prices. One can not write an article on house prices, without mentioning the stock of houses and demand for those properties.

Market is booming and will continue to do so because demand is there and supply is not.

Even in Spain now US companies are circling with a view to buying up properties at 40-60% discount.

We are on the cusp of a new era and people still talking about doom and gloom. Shocking.


Can't see the green shoots cause we are standing on them - (y)
 

cablemonster

Well-known member
Jan 3, 2013
1,370
257
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#14
Demand and rising prices does matter as it will stimulate increase in supply with builders chasing profits.

As mentioned if UK residents can't afford prices then foreign money coming in can. UK citizens will move out of London & SE to more affordable areas.

Before the crises some were talking about 50% falls and more with housing in the doldrums for years. House prices have been sticky downwards and 5 years is a reasonable period for stagnation.

My personal experiences is very positive and I still hold the view there is much money sloshing about in the system with even more coming in from; the Chinese millionaires, Russian billionaires and now rich & French tax dodgers.

My new colleague at work who has moved from Milan to London and is already looking to buy with a 2-bed with a budget of 500K.

I have heard of an Afghan man with multiple wives and properties in London and Italy. He offered to buy a friends freehold property approx 800K in cash. I hear money is coming in from really all directions.

Another firend is buying property in Exeter to rent to students. She currently has a house in Richmond.

Now I am one average citizen, labourer, working class, peasant :cheesy: and I see and hear all these stories around me. I hazard a guess as to what kind of deals the rich and well connected are conducting. :cool:

With respect to the housing stock, 1/3 of UK property is in flood plains. More people living in single households and going through divorce. This trend is likely to continue increasing demand for more homes. Won't mention immigration.

My solution would be to loosen up greenbelt rules and permitted developments and allow individuals to build their eco-friendly, off-grid, energy efficient homes. Stimulate the green industry and re-generate the country-side whilst improving quality of peoples lives.

However, as many vested interests lie in the pockets of politicians I doubt this will be an option for some time to come.

I re-iterate no matter what anyone thinks without looking at the number of houses and population growth, one is not realistic in their reflection of house prices. One can not write an article on house prices, without mentioning the stock of houses and demand for those properties.

Market is booming and will continue to do so because demand is there and supply is not.

Even in Spain now US companies are circling with a view to buying up properties at 40-60% discount.

We are on the cusp of a new era and people still talking about doom and gloom. Shocking.


Can't see the green shoots cause we are standing on them - (y)
Yes you are correct. Governments have made it clear they will not let anything fail. If economies falter again they will turn the taps back on. The only way to win here is to buy assets at any cost. People who dont take risks will get punished. People who hold sovereign debt could be in for a shock soon. Asset prices are going to the moon you cant print like that and expect them to stagnate. Property will soon be a closed shop for first time buyers and will just be passed between generations. Fill your boots.
 

Liquid validity

Well-known member
Sep 19, 2010
2,422
692
123
#15
Demand and rising prices does matter as it will stimulate increase in supply with builders chasing profits.
Either way, prices cannot keep going up if, this isn't a case of a
finite few who are willing and able to keep paying higher and higher prices.
Strong demand does exist, yet if it cannot afford to consume supply,
what happens then?
Builders either ration supply to take advantage of increasing prices,
which leads to unaffordable prices, which then come down.

The other way is Govt. subsidises private sector building programs,
leading to an easing of the supply problem.

I agree about London, that is exactly what I said, foreign cash using London
real estate as safe haven.
Not quite sure why you hammered home that point, that is not in contention,
at least not by me.
With respect to the housing stock, 1/3 of UK property is in flood plains. More people living in single households and going through divorce. This trend is likely to continue increasing demand for more homes. Won't mention immigration.
So you don't consider the fact that more people are more likely to
go multiple occupancy, or stay at home longer then?
There is plenty to suggest that is the case, when they are forced to, people
have a remarkable habit of adapting to the situation - they simply have no choice.
What drives prices higher then, as demand is removed by way of
multi occupancy and multi generational households?
That is quite easy to envisage, especially with an extension to an existing building.
Which brings me to the next point...
My solution would be to loosen up greenbelt rules and permitted developments and allow individuals to build their eco-friendly, off-grid, energy efficient homes. Stimulate the green industry and re-generate the country-side whilst improving quality of peoples lives.

However, as many vested interests lie in the pockets of politicians I doubt this will be an option for some time to come.
Green belt is not the only option, and I agree that is not likely to happen.
Brownfield is the target for new residential development.

Proposed relaxation of planning laws:
www.parliament.uk/briefing-papers/SN06418.pdf‎
One key point is going to the planning inspectorate if local permission refused.
http://www.planningportal.gov.uk/planning/planninginspectorate

Change of use - example, office space to residential, greater flexibility
with high street change of use:
http://www.nabarro.com/downloads/planning-new-planning-rules-in-force-from-30-may-2013.pdf

Relaxation of extension dimensions:
http://portaldirector.wordpress.com/2013/05/10/larger-house-extensions-regime-detailed/

So, supply becomes an issue, people keep up demand of that supply (prices keep rising),
or the demand dissipates as alternative supply is found.

Even in Spain now US companies are circling with a view to buying up properties at 40-60% discount.
Did it occur to you that U.S. companies may be doing that to diversify their
dollar risk, lets face it, there is an abundance of supply in Spain.
Globally, central banks have been re-balancing USD reserves for the last 10 years:
http://www.gold.org/download/pub_archive/pdf/Central_bank_diversification_strategies_paper.pdf

The Euro may not be great, but you can see CB's have increased Euro reserves,
so why not U.S. companies as well in the form of Euro denominated real estate.
Lets face it the Euro may not be great, but there are limitations on where you
can park that amount of money - namely supply, which Spain has.
We are on the cusp of a new era and people still talking about doom and gloom. Shocking.

Can't see the green shoots cause we are standing on them - (y)
Green shoots - you mean like indices inflated by printing money?
How about employment levels, OK U.S. figs are improving,
but UK figs are still shocking - set start date from 2000 or earlier:
http://www.tradingeconomics.com/united-states/unemployment-rate
http://www.tradingeconomics.com/united-kingdom/unemployment-rate

So what are these green shoots - a UK housing bubble that is being kept
inflated by the Govt?
If the UK housing market is so great, why did they take action in the first place...
Also what happens to that London bubble if people decide to put money into
Spain as you yourself have mentioned?

I do agree that we are on the cusp of a new era though:
At best, Japanese style stagflation of the developed west,
or the full fat depression thats been on ice for the last 5 years...
Why acknowledging that is considered doom and gloom I don't know,
you can either be a realist or an idealist, optimism should play no part.

1930's depression, 1970's stagflation, Japanese stagflation, Weimar, Zimbabwe etc.
So why will it be different this time round?
Printing money as the U.S has done, at best leads to the same situation
Japan has been in for years.
Personally I think 5-10 years of stagflation would be an amazingly good outcome.
The alternatives - read a history book.
 
Likes: Atilla