Will House Prices Keep Rising?

Will House Prices Keep Rising?

A very interesting article appeared in a recent edition of the “Financial Times” says David Lawrenson of LettingFocus.com.

In the article, Merryn Somerset Webb asked, “Will house prices will ever rise again?” A fair question.

Her view was that it was nearly impossible to answer this question if you do not have a good understanding of population trends, political priorities and things like income levels, interest and exchange rates. I agree and have written about this before, myself.

According to her, we are victims of having our experience slanted by the times we grew up in, which Somerset Webb argues is probably not at all typical.

For evidence, she quotes the latest Deutsche Bank Long Term Asset Return Study by Jim Reid and others which looks at a much longer term period.

Will House Prices Keep Rising?

This study is not the first to show that fast rising house prices are in fact a relatively recent phenomenon.

Since the start of World War Two, house prices have risen by three per cent a year after taking account of inflation. But taking a very long period from the late thirteenth century to 1939, it seems they mostly fell – by 50 per cent in total in fact, after the effects of inflation.

Wow, that is quite a long period – and the authors of the study admit that the data from “way back” in previous centuries was calculated using quite a host of assumptions. I’ll bet it was!

I cannot imagine Henry the Eighth or Richard the Third fretting over the latest Nationwide House Price Index.

So what was it that changed in the mid twentieth century to make house prices rise so fast? And could things change again?

Will House Prices Keep Rising? Demographic Trends

Somerset Webb rightly points out that a major part of the answer lies in demographics. She cites the discovery of advances like the smallpox vaccine in 1796 as big factors as they hugely increased life expectancy. Global population growth, which had sauntered at a growth rate of 0.17 per cent a year until 1820, shot up to 0.98 per cent a year from 1820 until the year 2000.

Looking at the more recent 50 years from 1950 to 2000, the global population more than doubled – leading to major consequences for a whole host of economic measures. For example, both inflation and unemployment rose fast in the 1970s as the baby boomers chased down a limited supply of jobs, but at the same time began to consume on a much bigger scale, also triggering inflation.

Later on, according to Somerset Webb, when these same baby boomers moved into their thirties and forties, this led to a stock market boom as people invested their earnings to help provide for their retirements. They also bought bigger and better houses than their parents could afford.

This cohort was large and also an active voting block whom politicians of those times were keen to keep happy. Many measures were passed to suit them – for example tax relief on mortgage interest on one’s own home (now gone!) and no CGT on sale of your main home either (still hanging on!).

Naturally, these fiscal measures stoked up demand for housing – which has always ran ahead of supply in land-constrained-not-in-my-back-yard Britain. It led to fast rising prices of houses from the mid-70s to 2008 (apart from a short sharp shock from 1989 to 1995, caused by a credit crisis and the elimination of double MIRAS relief).

As the links from money supply to gold had long been abandoned, so money supply could now be easily expanded, leading to lower interest rates. Low interest rates are good for real asset prices too, of course.

House Prices and Buy to Let

So, by the mid 80s, housing was now regularly getting good posts as “Always Being a Great Investment” which contributed to the entry of buy to let investors from the late 1980s, (a process which was also facilitated by changes to housing law, which made it easier to recover your property from a tenant, without needing to prove a default on rent). (The Scottish government, in 2017, reversed this, of course).

For many new landlords, as Somerset Webb correctly observes, the principal reason for investing in property was because it was a sort of pseudo-pension, (which I will add, was more reliable, more transparent and less costly than a stock market funds-based pension).

Since the financial crisis and stock market crash of 2008, ultra-low interest rates have meant that the actual cost of buying a home has been flat, because the rock bottom interest rates have compensated for still rising house prices.

So, what of the future, according to Merryn Somerset Webb.

Will House Prices Keep Rising? The Future

Her view is that the world will be very different in coming years.

She points out that if you look deeper, you will see that world population growth actually peaked in 1968 at two percent. Today it is closer to one per cent – removing a key driver to house price growth, she says.

She is not convinced that post-Brexit, the UK will be as attractive as it once was to migrants from overseas or investors from abroad – thus curtailing demand from overseas for UK residential property.

She thinks that due to rising wages and consumer inflationary pressures, interest rates are more likely to rise than fall, in the next few years, taking another plank from under house prices.

Finally, she shows how much harder life has got for the buy to let landlord, as a result of tax and regulatory changes – reductions in the scope of tax relief on loans, tighter affordability rules on loans, new energy efficiency rules and licensing changes, to name but four! And that is before we even come to changes on capital gains tax – where landlords have to pay 28%, (whereas for everything else it is 20%), the effective elimination of letting relief and possible future big increases in council tax / wealth taxes for more expensive properties. Finally, there are proposed surcharges for non-UK residents buying UK property too. All this will reduce the attractiveness of letting property.

And Mark Carney’s latest claim, this week, that house prices could be pole-axed by 30 per cent in the event of a no-deal Brexit is not great for building confidence in house prices either.

It is a great piece of work by Somerset Webb, but I don’t share her fears. Here’s why….

Will House Prices Keep Rising? Yes, We Think So!

Whilst, I agree it’s possible that house prices could be flat in real terms over the next ten to twenty years, that will still mean good gains in absolute terms.

The fact is that as people get richer they spend a higher percentage of their cash on luxuries and the goodies in life. Having a nice home is just one of these – but the biggest expenditure, by far. So, it’s not unusual to see that housing and rents form a higher percentage of people’s disposable income over time. As we get richer, this is just what people do.

If landlords exit the private rented sector market due to higher taxes and regulation, this will lead to a lack of supply of rented accommodation. In this scenario, rents will surely increase well ahead of inflation, keeping the sector (and the returns from property) attractive.

Also, I think that continued rapid technological changes will inevitably lead to low inflation or even negative inflation and hence low wage increases, (it has always done this historically – an important point missed by Somerset Webb), and this will tend to keep interest rates low for the foreseeable future too. These low interest rates will keep a full head of steam under real asset prices such as the price of housing.

Finally, lots of recent data shows that foreign buyers are still very active, taking full advantage of the weak pound. They are clearly not that bothered about Brexit.

Of course, some areas and types of property will do less well than others. But there will also be areas in the housing market where strong regeneration stories will lead to house prices and rents that far outpace the impact of inflation.

At LettingFocus, we can help you find those areas.

So, in conclusion, IMHO, there are still many reasons to be cheerful.

The link to the full article in the Financial Times is here:

https://www.ft.com/content/e115268e-e35e-11e8-a6e5-792428919cee

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One comment

  • I think property prices will, in most cases, increase over the long-term regardless the short term economic and policitical difficulties. The issue is with people’s level of patience. If you want a quick profit in the short term, it might not likely happen, leaving people to worry that house prices are decreasing or stagnating.

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