House Price Bubble

Are we in a house price bubble?
Should I buy now, or have house prices reached their peak and are about to fall or even crash?

These are some of the questions that private landlords and institutional investors often ask us at LettingFocus.

And the fact is I don’t now the answer.

There is an old story from rural Kent in which the visitor asks a local, “How do I get to Canterbury?” The local scratches his nose, thinks for a minute and then says, “Well, if I was you, I wouldn’t start from here.”

And so, in a similar vein, and about as much help I suppose, the best I can say to would be investors is often, “Well, it would have been better if you had bought back in 2009….. or 2003 …..or 1994 (previous low points).”

The fact is it is very hard to “call” the top or the bottom of the market.

But, more helpfully, I also tell house buyers they can still do well, and not lose money, by buying in areas that, for a variety of reasons will see house price and rental growth in the future. And they can also do well by buying property more cheaply than most other people do and / or by adding capital and / or rental value through refurbishment and upgrading property.

This is what we, at LettingFocus.com can advise on.

Thinking about where house prices are heading in the future, here are some interesting UK and international statistics to mull over.

House Price Bubble

Did you know that only 12% of bank lending – about £232bn – went to companies to invest in ways that had nothing to do with property. And four fifths of ALL UK bank lending, to consumers and businesses together, is linked to the property market? So banks clearly know a safe investment when they see it, though I think we would all like to see real bank investment going to small and mid sized businesses – the engines of real economic growth.

Looking overseas, property deflation has been a real issue in many places.

Did you know that real Japanese house prices have almost halved since 1992 and house prices in New York have fallen by a third since 2006 and are at about the same level as in the mid 1980s relative to rents, income or inflation?

London House Prices

Should the UK, especially London, behave any differently? Is it a special case?

Well, London has “history” too – and anyone with any grey hair will know that house prices here are not a one way bet either.

In the summer of 1989 the average London house price was £98,000, which was thought to be astronomic at the time. But prices then fell by one third over the next 5 years to 1994 and did not top £100,000 again until 1998. Cumulative inflation over that nine year period was over 50%, so if you bought London housing in the late 1980s it was not the best investment.

However, one saving grace for landlords was that there was also strong rental inflation during that time, so landlords in the then tiny private rented sector did somewhat better than other home buyers. And in considering if we are now at the top of the market, the fact that rents often go up when house prices fall should be some real comfort for landlords.
(* First time buyers tend to stay out of the market if they think house prices will fall in the future, hoping to buy at lower prices later. Also, in periods of tight lending, which often goes hand-in-hand with property deflation, first time and second time buyers are often unable to get mortgages. Both factors means they will tend to rent more, thus pushing up rent levels.)

UK House Prices Drivers

The drivers for rising house prices in the UK today are:

1) increasing investment from overseas in our property market,
2) housing supply that cannot match the level of uncontrolled immigration and
3) attractive yields on residential property compared to returns from the bank and from shares. Plus, on top of these factors, there is perhaps something of a panic to buy to avoid being further “priced out” – which some would say is the real madness.

How long these factors can last is really anyone’s guess. At LettingFocus Towers we are still buying property but are very selective on where we buy and we have to admit it is getting harder to find places where we think we can add value ourselves.