House Price Forecasts Ignore the Impact of the Private Rented Sector

I’ll publish my ideas for how Local Authorities should be working now to deal with the impact of rising LHA rates next week.

For now, I’ll return to an interesting question that comes up a lot – and that is the issue of house prices and whether they will go up or down in the near future.

A number of commentators writing in the mainstream press are always very keen to compare the historical ratios between house prices and average earnings and come to the conclusion that house prices are either too high or too low relative to this historic ratio and must either go down or up accordingly. Usually, they say they are too high and will drop anything from 10% to over 30%. To me this analysis is a bit too simplified.

I must say right away that I’m not a cheerleader for higher or lower house prices. I have the view that it ought to be possible for ordinary people who work hard and save a bit to be able to buy their own property (if they want to do that – and of course many don’t.)

Other Factors Are At Work

The problem with simplistic comparisons of house prices to average earnings is that they do not take account of the level of prevailing and future expected interest rates, the rate of current or future expected employment, the rate of current and expected future inflation or the population size. Should I go on? It could be that base rates will stay low for a long time – and so may inflation too. The same goes for the other “drivers” – the fact is we just don’t know.

Now, of course, we could happily sit down and input things like the median level of interest rates, the median level of employment etc – i.e. that which it has been on average over the last 30 or so years  -and then say, hey, house prices are above (or below) their long term mean and must therefore fall (or rise.)

That’s reasonable enough but the problem with doing that is that it could be the case that the next 30 years could be very unlike the last 30 years in terms of these driving forces. Take the Japanese experience for example – they have had zero or negative inflation for 20 years or so and as all investors there will know, their stock market is still less than a third of what it was in 1989.

Here in the UK, we might repeat the experience of Japan or we might not. Again, we just don’t know. Sure, there are macro factors like the growth of China and the increase in the amount of low cost goods  – which have driven down inflation in the West. That might continue or it might not (for political reasons as much as anything else) and your informed opinion on this is likely to be about as right as any City analyst with a private education, a spotty face and a recent PPE degree from Oxford.

One Big Factor is the Private Rented Sector’s Growth

But there is one thing about these house price forecasts that we can say and that is this:

We know that since 1989 the private rented sector has grown from about 8% of all the UK’s housing stock to over 15% (and it is much higher than that in some areas – notably London.)  This must surely have a  huge impact on house prices because the price of a property in the private sector is driven now (at least in part) not just by folks’ earnings (and all the other stuff like inflation and interest rates) but also by the yield that a property can produce as a rented asset.

Yield is a key driver of commercial property prices and now that lots of non- commercial property is rented out, it should not be ignored by analysts who wish to make predictions about the price of houses. But too often it is ignored.

Net rental yields (after all running costs) in London are at about the 4 to 5% level right now. That is much the same as you get on the FTSE 100 if you pick the right high yielding shares. The outlook for house price growth (away from the prime stock currently being gobbled up by well off tax avoiding refugees from Greece and the like ) is pretty flat or even downhill a bit for the next 12 months. The outlook for rises in share prices is choppy, but again, who really knows?

However, these private rented sector rental yield levels, while not as great as they once were, are not that bad either and because of this, I don’t think house prices are about to fall off a cliff as the “earnings-to-price-multiplier fans” suggest they will.

Will house prices ever become as affordable for first time buyers that they were before? Yes, possibly. The more affordable house prices we saw in the mid 80s and mid 90s could come back again –we will just need the stars in the economic firmament to be lined up right again.  I can’t see that happening for quite a while, but again, we just don’t know.

People who own property, the tenants who rent the houses, the first time buyer who would like to buy – all of us are facing some difficult times now. The key is to invest sensibly but to try to keep debt down and to manage your assets well. As one of my birthday cards this year said, “Keep Calm and Carry On.”

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