How Prices are impacted by many things including Buy to Let and Available Land Supply
If more land could be built on more readily then house prices would fall. However, this may be politically unacceptable says David Lawrenson of www.LettingFocus.com in this new piece which looks at the things that drive house prices.
There was an interesting piece by Stephen Wilmot in the Investors Chronicle last week, called “House Prices are Still Key to Buy to Let”.
In the piece Stephen went over some of the old arguments about whether or not house prices are overvalued.
Naturally, he referred to perennial doom mongers Capital Economics who are always banging on about how house prices are too high – using as their justification for this, the current high house price to earnings ratio and their assumption that this measure should “revert to mean” in the long run, which in turn must mean that house prices will inevitably fall.
Apart from the slightly depressing problem that as Keynes said, “in the long run we’ll all be dead” the Capital Economics argument also ignores the impact of mega low interest rates (of which there is currently no sign of an end to just yet) and the fact that as people get richer they may well decide to allocate a higher proportion of their earnings on luxuries, of which naturally enough a house can be said to be one.
If interest rates are low, repayments are low and as people get wealthy they want to live somewhere nice and are prepared to bung a higher proportion of their money to that end, including using inheritance capital (which they may opt to give to their kids early to help them on the housing ladder).
Then there is also the fact that we have high inward migration, a fast rising population and not enough houses being built. All this creates something of what I call “an expectation effect”. In other words, if we all believe there will be a shortage of something (in this case houses) then we will buy into this in the expectation of making a future gain. Yes, I know most people just think of a house as a place to live, but many folk do “buy and sell the land for private gain” to quote one early “socialist” from long bygone days in the year 1649 at St Georges Hill. (Those sniggering at the back read your history of the Diggers!)
Rental Yield and House Prices
Just like me in past blogs, Stephen also looks at whether a better measure of whether house prices make sense is rental yield.
The argument with this goes as follows: If rental yields are very high, investors will be attracted into the market and house prices eventually fall. I rather like this idea of yields being linked to house prices and we know that this is how commercial property pricing works.
And so my main argument against Capital Economics is that whilst their simple model worked OK whilst the private rented sector was small, it simply does not work so well now that a private rented sector is established and of enough size. Everyone and his dog should know that landlords look at yield just as much as house price growth.
But one thing the article did not look at is land supply.
Land supply for residential development is a sort of “given” and I think that’s why many people don’t look at it as a factor in house price forecasting.
The fact is that land for which residential development has been permitted is always at a huge multiple of the cost of farmland just next door. And that’s why from time to time, at property shows, you will often see a load of scammers in shiny suits trying to convince daft punters to buy a field somewhere that is supposed to soon be given the green light for housing. (A risky business and one you should avoid!)
Of course vested interests – the middle class, you and me, the National Trust, Prince Charles, Sir Hugo Bufton Tufton and Uncle Tom Cobbley and all are dead against building in our dear backyards.
And as people like you and I tend to vote a lot more than non homeowners, the young and recent migrants, the government is reluctant to upset us by giving the green light to build all over this green and pleasant land, or even to build all that much in a city. (Here in inner London where I live we are not exactly happy about the monumental tower blocks going up in the centre of our lovely Lewisham either).
But, nothing is ever a given in this life. And if a government was prepared to risk losing huge amounts of votes by making it far easier to build on new or even reclaimed land, house prices could fall like a stone.
ABOUT LETTINGFOCUS AND WHAT WE DO
LettingFocus.com is the home of Private Rented Sector Consultancy expert advice.
Services to Businesses and the Public Sector
We advise a range of organisations including banks, building societies, local authorities, social housing providers, institutional investors and insurers. We help them develop and improve their services and products for private landlords.
Services for Private Landlords
We also help landlords and property investors by showing them how to make money in the private rented sector using ways which are fair to tenants and which involve minimal risk.
To read blog posts on related posts use the tags and categories at the bottom of each post (after the list of links), or over to the right of this page – where, you can click on “Select Categories” and use the pull down menu to read all the posts on any Category that interests you.
THE HOME PAGE OF THE MAIN SITE
For our main home page click here: http://www.LettingFocus.com
For general info on our CONSULTING SERVICES and also to find a small sample of links to where our comments have been featured in the National Press please click: Consultancy and Seminars
For ONE TO ONE PRIVATE CONSULTANCY FOR PRIVATE LANDLORDS click here: Property Advice
TO READ CLIENT TESTIMONIALS – from both organisations and private landlords click here: Testimonials
BUY “SUCCESSFUL PROPERTY LETTING”
Our book is the highest selling property book in the UK. Click here to Find Out More and Buy it at Amazon. If you are from an organisation and would like to bulk buy at least 50 books please ask us for special rates.
TO JOIN OUR FREE NEWSLETTER and get our latest Newsletter which goes to over 3,000 people (as at December 2011) just send an email to [email protected]
We do not spam or sell our mailing list to advertisers, though we occasionally mail landlords about good products from third parties. Please put us on your “white list” to ensure you receive our emails.
OFFERS ON PRODUCTS FOR LANDLORDS and TO ADVERTISE YOUR PRODUCTS to LANDLORDS click here: Landlords Resources
Please note we only allow selected advertisers to market their services.
PERUSE LAST TEN BLOGS BY GETTING THE RSS FEED: Click Here
NEXT SEMINAR EVENT FOR LANDLORDS: Landlord and Property Letting Seminar
Copyright of Blog: David Lawrenson 2012. Please link to us here or quote us.We actively pursue copyright infringements. The blog is updated once a week.
TWITTER PAGE For my thoughts on property, personal finance, plus other random things from sport, to 80s and 90s Indy Music, to tsunamis to musings on boardroom pay, plus my (usually) centre left “take” on politics please see our Twitter page.
LINK TO THIS BLOG OR TO OUR WEBSITE