Deflation, House Prices and Population

David Lawrenson of private rent consultancy argues that long term deflation of house prices in the UK is unlikely – but a lot depends on demography.

Deflation, House Prices and Population

As a lad who grew up in the 70s and 80s, it is really hard to imagine a Britain where the government is not fighting inflation.

At school and at university, the models of the economy we studied were about inflation – what caused it and how to fight it. The deflation of the early 1930s was consigned to history – in a different type of world that could not be repeated in modern times.

So we learnt about the theories of Keynes and Friedman but usually always with the background of inflationary pressures.

And so, suddenly living in a world of deflation, seems odd to me and many people of my age.

We all know the causes – and I am not going to go into that here, but one big question for the UK is – could the deflation we are seeing for everyday goods translate into continuously falling house prices too?

House Price Crash? It has Happened Before

Now, we have seen falling houses before – and not so long ago either. From 1989 to 1995 house prices fell throughout the UK by about 35 to 40%, depending whose stats you believe – leaving hundreds of thousands of people in negative equity. And many people have forgotten it already.

So, could that happen again today and what would it mean for homeowners and landlords?

Well, for people for have large loans secured against residential property, the position would be bad because if you have an interest only mortgage, your level of mortgage debt would stay the same but the “earning power” to pay off that debt would be diminishing as real earnings fell.

And as prices and earnings fall, rents would likely fall too. This means you, as a landlord, would see rents falling whilst your mortgage debt stays the same and the value of the asset – i.e. the house – also diminishes.

So, lower rents, falling house values but your mortgage debt stays the same. Not a good scenario is it? (The fear of this partly explains why the silly banks and building societies are so worried about all the interest only loans they sold when times were better).

House Price Deflation – Lessons from Japan

People often point to Japan as an example of what could happen in the UK.

Japan has had deflation on and off since 1989 and Japanese house prices have fallen along with every other asset there. As an illustration of this, the Japanese stock market is today only half of what it was in 1989 – more than 25 years later. Ouch.

Could Europe and the UK end up like Japan?

Well, Europe indeed could.

Post-Lehmans and despite all the interventions we have had by the European Central Bank, we could be seeing the start of entrenched deflation in Europe. (Deflation has been going on for 6 years in most of southern Europe already).

But we don’t know – we are in unchartered territory now, so anything could happen.

However, there is a big difference between the UK and Japan.

In Japan, they have an ageing and shrinking population. And  the Japanese don’t really “do immigration” either. (Aside: Japan is often cited as a basket economy of negative GDP growth, but this overlooks the fact that growth in output per worker in Japan has far excelled that in Europe and the US because less Japanese workers  are producing more. The only problem is that they have a huge, growing old-aged population to support too).

And this immigration issue is a big difference between them and us.

Migration, Population and House Prices

In the UK, at least in the more prosperous cities, the population has been swelled by big increases in immigration. Add to that, the lack of available land and planning restrictions constricting housing supply, and we still have inflationary pressures on rents and house prices.

So, unless immigration suddenly turns off and the land is suddenly made free for Barratts and co to build lots of houses on, then these inflationary pressures on rents and house prices will still be in place – at least in the booming parts of the UK.

If immigration were suddenly to be turned off, which could happen if our economy was suddenly less attractive to Europeans, (who form the vast bulk of new arrivals who mostly come to work), then this key driver of inflation of house prices and rents shudders to a halt.

And could planning restrictions be eased despite the objections of many, keen to preserve empty spaces?

Both these things are unlikely, I know, but they are possible.

The trick to reduce your own risk by buying in areas that will be booming and where inflationary pressures will still exist – even if your plumber of the future will be called Peter not Piotr.

At LettingFocus we advise on how to do this.


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David Lawrenson, founder of LettingFocus also writes for property portals, speaks at property events and is regularly quoted by the media.

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