Three reasons property prices will struggle this year

It’s official.

UK house prices have gone virtually nowhere over the past two years. According to the Nationwide, over the course of 2012, prices fell by 1%. That follows the 1% rise seen in 2011.

In December 2010, the average house price was £162,249. Last month, it was £162,262.

Of course, that national average conceals some big regional variations, as we’ll see below. All the same, overall, the UK property market has probably been one of the least exciting asset classes of the past couple of years.

But will that continue in 2013?

Prices up in the south-east – down everywhere else

The trouble with looking at house price indices these days is that there’s such a wide disparity between areas of the country that the average doesn’t tell you that much. It doesn’t help that sales are so few and far between, which makes the data even lumpier.

But you have to work with what you’ve got. According to Nationwide’s data, only two regions in Britain saw price rises last year: London (up 0.7%) and the south-west (up 0.2%). Within England, most other areas were flat or a little lower.

Prices in Wales and Scotland fell by around 3%. Northern Ireland (which is a special case because it’s affected by the Irish housing boom and bust too), prices were down 8.2%.

If you dig even deeper, data from the Halifax suggests that the area that saw the biggest increase last year was Southend-on-Sea. Prices there rose by nearly 15% last year. Other London commuter towns such as Rochester and Dartford also saw big gains. Meanwhile, almost all of the worst-hit towns were in Scotland or northern England.

The message from this is pretty clear. The employment situation might be pretty healthy in the south-east, but anyone who wants to buy is being pushed ever further out of London to find a house they can still afford. The likes of Southend and Rochester are at the cheaper end of the commuter belt. They’re still just about affordable and with a bearable journey to London, but not as salubrious or convenient as the likes of Sevenoaks.

Meanwhile, outside the south-east, where the worst of the recession has been felt so far, prices just keep drifting lower. Can we expect any change to this pattern this year?

Life is going to get harder for potential buyers in 2013

As my colleague Merryn Somerset Webb noted in the last issue of MoneyWeek magazine, most pundits think prices will be flat to slightly higher next year.

You can see why. The government and the Bank of England are doing their very best to keep prices propped up. Interest rates remain extremely low. And the Funding for Lending scheme actively encourages banks to borrow cheap money to lend back out to homebuyers.

(This comes at the expense of savers, of course. If banks can get cheap money from the Bank of England, there isn’t as much pressure on them to raise money from the likes of you and me).

But how much more propping up can the government do? The trouble with Funding for Lending is that it is making home loans cheaper for people who can already afford to buy. So on that score, it’s not making a huge difference to overall demand.

As Matthew Pointon of Capital Economics points out, there are lots of people renting properties just now who would like to be able to buy. But the size of the deposit required is making it nigh-on impossible for them to do so.

Pointon notes that a 20% deposit on a typical first-time buyer property priced at £140,000 (according to Nationwide), comes in at £28,000. To save that within five years, assuming an interest rate of 2.5%, you’d need to put away £450 a month. That’s a staggering amount to save for most people, even those with double incomes and no children.

And as Pointon says, very few are saving anything like that much. In fact, even if the average deposit fell to 10%, only around one in ten renters is saving enough to be able to buy a house in five years’ time.

It’ll get even harder. Wages are still rising more slowly than inflation. And the Bank of England seems intent on finding more excuses to ignore inflation this year. There’s lots of talk of ‘nominal GDP’ targeting floating around (which is essentially an excuse to allow inflation to rise above the current 2% target rate).

That means people will have even less disposable income available as each year passes. That makes saving enough for a deposit even more difficult. So it seems safe to say that life will get even harder for first-time buyers this year.

Who’s left? There are all those wealthy foreigners, of course. But foreign money can be very fickle. If the eurozone crisis eases, or even comes to an end (even if it’s a bad one), a lot of that money will start looking for opportunities elsewhere. You’ve also got the pick-up in the US housing market to attract buyers.

Meanwhile, the government is raising taxes on the most expensive properties, something that looks likely to continue.

In other words, conditions are becoming steadily less favourable for most potential buyers in the UK property market, at a time when interest rates can’t really go any lower. As Merryn noted, given the extent of government intervention in the market, it’s hard to say for sure what will happen next. But we certainly wouldn’t be rushing out to invest in buy-to-let property – not even in Southend.

You can read more about what our experts think about the outlook for the UK market in our most recent property Roundtable, from early December. If you’re not already a subscriber, subscribe to MoneyWeek magazine.

• This article is taken from the free investment email Money Morning. Sign up to Money Morning here .

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  • Peter Kellow

    What happened to free markets and Adam Smith’s “invisible hand”?
    Do they still teach that stuff in universities?

  • Jon

    Hi… if £450 is a “staggering amount” for an FTB to save each month for a deposit, what is the relative adjective that describes the ongoing monthly amount required to service the interest and repay the principle of the £112,000 mortgage ?

  • Neville C

    But don’t forget during the deposit saving period, there will most likely be rent to pay as well, therefore the £650 p/m (based upon 25 yr repayment mortgage @ 5%) is actually likely to be more affordable.

  • tuesday

    Still banging the same old drum into the New Year then!
    House prices being flat is quite an improvement on the catastrophic collapse Money Week has been predicting for the last years isn’t it?
    I have to ask why there is this stubborn negativity on this subject from you guys?
    Is it because MW writers themselves have missed out on the gains made by investors who ignored their advice (As Dominic Frisby has acknowledged)? Or is it because if people invest in property they are not likely to be that interested in the week by week fluctuations of shares and associated commentary which is the main content of the magazine?
    If your dire warnings about inflation are true, then people would be surely advised to buy property on a fixed rate mortgage- a tangible asset funded by a loan whose real cost inflation will reduce.
    Sure it’s tough on FTBs but this in an investment magazine – don’t selectively use social commentary to bolster a weak argument.

  • Avon Barksdale

    Well said, Tuesday. These guy have been banging on about the “imminent” house price collapse since forever and, frankly, anything with UK property in the heading of their emails goes straight into the trash.

    The bottom line is this: UK house prices will NOT plunge until interest rates go UP: that’s it – end of story – and since that isn’t going to happen any time soon, readers would do best to just ignore MoneyWeek’s incessant waffle on the matter.

  • FotheringtonSmythe

    @tuesday – an insightful response… tell me, what aspects of the data used by MW do you find to be ‘weak’? Which of the market fundamentals often used by MW do you find disagreeable? As a shrewd investor, knowing the socio-political effects surrounding a given asset are invaluable as such aspects are what ultimately dictate future direction.

    Putting aside the extreme Weimar scenario (if this happens, we will have bigger things to worry about), even with inflation running above target house prices have remained stagnant and removing the London factor, have actually fallen.

    Let’s say I have a spare £25k… Can you explain why I should leverage myself in order to buy into such an illiquid asset, pointing out the risks involved and what other options are available?

  • Orb

    While I agree with tuesday’s and Avon Barksdale’s view (@4 & 5) that MW got it wrong re a property crash, I do agree with MW & FotheringtonSmythe @6 that it has been – and will continue to be – a poor investment.

    Inflation has raced on while property prices have remained largely unchanged. That implies a loss in real terms. And a decent savings account will pay 3%, which is also realistically below ordinary people’s inflation rate, but at least it’s some return and readily available, unlike property.

    I think buying a house in today’s market (excl. auction type bargains) is a viable alternative to renting, but not a viable investment just yet.

  • mcnulty

    yo avon

    y’all makin sense home boy

  • alec

    Clearly banks and building societies think house prices are still far too expensive. Why would they be calling for 40% deposit for mortgages. Simple, they don’t want any more toxic debts and this time the house-buyer will take the hit.

  • Boris MacDonut

    ….and the three reasons are what exactly? Interest rates are low,deposits are a bit on the high side and wages are sluggish seems to be what you cite. That may be and they have been so for 5 years….but prices have not fallen.
    By my reckoning if incomes rise at just 2%pa and interest rates return gradually to about 4 or 5%,house prices will still rise by at least 25% in the next decade.
    #4 tuesday. Spot on. MW is like a stuck record on the housing thing.

  • RP

    If we want our children to have the opportunity to buy their own houses then the Government need to tax multiple house owners, typically 60 year old millionaires hoovering up all of the 2 and 3 bed houses to rent out – to ‘Takers’ who have the DHSS pay then rent for them. An announcement of 50% stamp duty for anybody purchasing their 3rd concurrent property and 50% captital gains tax in 2014 for anybody selling their 3rd or more concurrently owned property. DHSS is underpinning the artificially high rents, attracting landlords and maintaining prices beyond thereach of our working kids.

  • GFL

    Property is a very strange asset, since it makes up such a large percentage of both the British economy and the banks balance sheet. To compound this further unlike other assets it is leveraged to the hilt – therefore a sharp decline in prices would pretty much make every bank insolvent and push the country into a deep recession.

    Therefore the government and the BoE will always do whatever it takes to keep property prices rising, even if that means diverting a huge amount of resources from other, more productive, sectors of the economy. I believe this is what MW failed to factor into their calculations.

    But the overall tone from MW has been correct, house prices have been flat in nominal terms and declining in real terms, even with such loose monetary policy (helped by Europe). Best case scenario, housing is flat over the coming years, worse case IR is forced up, which will bring prices down.

  • ABL

    Well said GFL The best comment on this subject I have read for a long time.

  • NeutronWarp9

    But 6-Fothy, nobody is telling you to do anything with your virtual 25k, but if you choose to buy property do so on the basis 95% of other people have: it’s always gone up annit!
    For MacD to assume 2% wage growth in one year is pie in the sky fantasy, but per annum is surreal. In this climate, if you have a job be grateful is the order of the day and even a 2% uplift is pretty much running still in real terms. Interest rates at 4 to 5% is think of a number time and IF house prices rise by, say, 25% within a decade our bread and beer will have risen 250%. In real and relative terms, therefore, house prices fall.
    A big bang house fall is probably unlikely, because the government’s and BOE’s primary role is to maintain confidence and avoid panic – hence the insidious erosion of our wealth via QE is the preferred option.
    Put you 25k into Gold, silver and diamonds, Fothy.

  • Boris MacDonut

    #14 Neutron. There you go seeking to put words into my mouth. Where did I say wages would rise by 2% pa? I said “incomes” and I said “if”. I am merely referring to what is most likely to happen. We live in an uncertain world ,but we can look to long term averages as a guide to what is more likely to occur…….and please don’t make me explain the difference between income and wages again, even you must have picked it up by now.

  • Matt

    Spot on @12 GFL.

    As much as I would like to believe that the ridiculously expensive housing market will correct, the BoE and every successive government will do everything within their powers to stop this happening. Since the government will lose any election following a sizable correction,and they own the only printing press in the country, they will get their way.

    This should leaf to rampant inflation as the UK prints, devalues Sterling and forces up import prices, but the US, Japan, Euro zone Switzerland and more are all holding their currencies down too.

    Take a look at mortgage availability due to funding for lending, it has, and will continue to increase massively

  • tuesday

    London was included in MW’s original apocalyptic warnings but was quietly excluded and is now mentioned in passing. But why ‘leave the London factor out”? If you invested in residential here over the last years, you would have profited: rents, values and demand have increased, interest has not (and you could have a potential inflation hedge in real terms).
    MW refuse to admit what investors here know because they called it wrong.
    In a Weimar situation, we will have other things to worry us – gold will not help that much. You might profit as things collapsed I suppose but what will you do with it?
    I am concerned about social issues too: Labour could have re-introduced fair rents, increased taxes on third properties etc but they didn’t. That isn’t the point, this is an investment magazine or why not debate the ethics of BAE systems as well? As John Burford says, MW has an attachment to Gold because of a past guess – and it dislikes for property for the same reason.

  • Nick

    The underlying assumption in most of the media (and government) is that house prices going up is a good thing and should be encouraged come what may. In fact it’s taken as a sign of economic malaise if they drop.

    But how do they think that’s meant to work? Prices are already out of reach of FTBs, the only way they can go up and the market still function is to encourage people to borrow more and more money. Is it really healthy for us as a society to have people borrow 7-10 times their income just for a house?

    At some point we are going to have to address this elephant in the room, especially as we’re also telling the banks not to repeat the stupid lending mistakes of the past.

  • tuesday

    They are now frightened of them going down rather than believing in the good of them going up – because of the effect on the banks.

    We can argue about the unfairness of it, but in investment terms if there isn’t the demand, the market will bring prices down. The issue is that there is huge pent up demand: people want to buy – for themselves as FTBs, for their kids, as an investment, to park foreign money.

    If MW are eventually right (like the boy who cried wolf), interest rates up, prices down, will that make it any more affordable for FTBs?! No, mortgages will be more much expensive, the banks more risk averse.

    It would be interesting to know what the MW staff personally have in terms of property – possibly that would give some insight into their position.

    I can think of three reasons why you would be keen for a price crash:
    1 You /your kids don’t own a home
    2 You do but you haven’t invested in property
    3 You want to invest in more property

  • FotheringtonSmythe

    @NW9 – Not sold on the idea that something already at historical highs is going to go even higher given the collapse of western currencies. If this happens, tinned beans, bottled water and firearms may prove a better hedge than diamonds, silver and gold?… No, ETFs and preferreds is my bag. Security, diversity and liquidity offering reasonable returns.

    @tuesdays – Yes MW predictions are wrong but only in the sense of timing. It isn’t down to dodgy data or misleading fundamentals. The housing market is now political making the timing of predictions are a hard call. However, I know for sure that I don’t want to be left leveraged to the max with an over-priced asset I can’t get rid of if/when the government change their minds and everyone rushes for the exit!

  • FotheringtonSmythe

    @tuesdays – next questions… Why is it considered good that house prices go up? What do you have in terms of property?

    On a related note… I am all for seeing policies that discourage speculation on property and put an end to it being viewed as an investment. It causes a massive miss-allocation of resources into an unproductive area of the economy. This incredibly selfish obsession with rising property prices will do nothing but damage the ability of UK businesses to compete at an international level.

  • Ellen

    Speculatively, I think the basic rule of thumb for the current government policies is, if it profits older and established people at the expense of young people and young families starting out, they will put their full weight behind it. This reflects their policies on maintaining the housing bubble, the introduction of extortionate student fees and extortionate interest rates thereon and the debasement of the currency the general population work for and rely on to pay their bills.

    So the climate for the maintenance of high house prices will remain and the only people who will be able to afford them are those who are lucky enough to not have to handle sterling.

    The tories, then, can stop bleating on about loss of sovereignty to the EU and take a look at the feudal overlords, they enable, who buy up this country bit by bit with any other currency.

  • Orb

    Many cite the IR as having remained low since 2008 – don’t be fooled!

    In Oct’08 we remortgaged from a 2-yr fixed @ 0.24% above BoE, no arrangement fees (there were many better rates on offer for lower LTVs), to a lifetime tracker @ 0.99% above BoE, no arrangement fees (the best offer available with our then favourable LTV of <75%).

    Having relocated and looking to trade with a further improved LTV (around 50% now!), we find the best equivalent offer available – no arrangement fees – to be a lifetime tracker @ 3.29% above BoE, no arrangement fees!

    Back in ’08, our new 1.49% mortgage drew little attention – many had much better rates than that. Now many look at our rate in envy!

  • Orb

    There are better rates available, but only if you’re prepared to pay a large booking/arrangment (or both!) fee, or have held a chargeable current account with the institution for a minimum term. Each of these requirements effectively chases the rates up to or beyond the already quoted ‘best rates’

    So while the BoE may have lowered rates to 0.5% and kept them there for over 4 years now, at the retail level, they appear to have risen over 100% in many cases.

  • ken

    as usual boris macdonut is wrong as is avon barkdale.

  • Mark Hazeldine

    I’d love to know why John Stepek sticks that line in at the end about staying away from buy to let, when his whole argument in the rest of the article talks about how tenant demand (and by virtue, rents) will continue to increase. Sounds like a perfect storm for buy to let to me. Flat prices, lowish mortgage rates, high rents and demand!
    People always have this obsession with house prices and growth but that’s only half the story. You forget rental income and that your yield is multiplied by your leverage (5% yield on a 75%LTV mortgage is actually 20% ROCE). Then add into the mix that you can buy discounted property if you’re a good bargain hunter and add value the refurbishments and remortgaging, and the fact that inflation will eat away at your debt,AND that you’ll probably hold the property for 10 years plus, by which time (looking at history) your property price will probably at least be the same, but more likely higher…the picture starts to look a bit different to my eyes.

  • Boris MacDonut

    #25 ken .Are you suggesting incomes won’t rise by 2% pa in the next decade? Also that interest rates will not return to 5%. Please let me know what you think they may be and I can give you aa approx HP. But on the figures I quote prices should rise 25%.

  • Orb

    Mark @26, not sure about your maths: Have you factored in interest deductions against the rental income? What about agent’s management fees? Technically, one might even include depreciation?

    In our case of 1.5% IR, no management fees or depreciation, and LTV of 63%, our ROE is just 6.6%.

  • Calculator

    I’ve been investigating BTL for months now in various towns throughout the UK and can’t get the calculations to stack up. Even with tax-deductible interest, most BTL mortgages require a big outlay of cash and the rates aren’t great. Yes, you might cover your repayments and get a bit more on top but it doesn’t seem worth the incredible hassle of a property transaction – let alone shelling out for the months when you don’t have a tenant.

  • PV70

    I’d like to know how BTL market is doing as it has been supporting the sales market. Rather strangely in North London some ambitiously priced rental properties have no takers and sales prices are stagnant. People keep on going on about how over populated thus island is. Just travel on a train from London to Manchester and you suddenly realise how much space there is!

  • PV70

    I’d like to know how BTL market is doing as it has been supporting the sales market. Rather strangely in North London some ambitiously priced rental properties have no takers and sales prices are stagnant. People keep on going on about how over populated thus island is. Just travel on a train from London to Manchester and you suddenly realise how much space there is!

  • PV70

    I’d like to know how BTL market is doing as it has been supporting the sales market. Rather strangely in North London some ambitiously priced rental properties have no takers and sales prices are stagnant. People keep on going on about how over populated thus island is. Just travel on a train from London to Manchester and you suddenly realise how much space there is!

  • TimG

    @GSL #12

    “a sharp decline in prices would pretty much make every bank insolvent and push the country into a deep recession”

    I don’t follow this argument. Once the loan has been made it does not matter if house prices go down – the loan remains the same and must be repaid (with interest). The bank only makes a loss if the loan defaults.

    Perhaps you think that if prices go down defaults are more likely. But it seems to me the opposite is true. If prices go down, there will be more money available for other things and the economy will improve, making default less likely.

    The banks profit enormously from high and rising prices – if prices come down they will just profit a bit less.

    I also don’t buy the idea that the general population want rising house prices. Certainly young people (and their parents) don’t.

  • PV70

    Reed Rains has just closed down in Finchley. More agents will go this year.

    #26 – there’s a limit of how high rents can go. Once they have gone too high people will simply start defaulting. At the end of the day, it’s all simple maths. If you earn £2k a month after taxes you possibly can’t pay a monthly rent of £1.5k for very long!

  • The Planet


    You’re right: I can never remember Money Week having had anything positive to say about property – in the boom it was don’t buy, prices will collapse and now it’s don’t buy because … err … prices will collapse.

    I’ve blogged about this and given my own views on why MW is so negative about property: (link to Planet Property blog).

  • PV70

    #35 – Perhaps there is a reason why MW has been and still is negative of UK property (but now actually quite positive about the US property market). They were one of the very few to spot the bubble and, yes it did happen.

    The only reasons that prices haven’t fallen dramatically are the Bank of England (Government) intervention and interest-only mortgages. There simply haven’t been many forced sales and as long as the interest rates remain low, there probably won’t.

    The time to buy was the late mid to late ’90’s. House prices were very reasonable in relation to take home pay and you didn’t need to spend half of your life saving for a deposit. Times were better.

    Mortgages are currently affordable only due to all time low interest rates. Rents are supposedly creeping up due to ‘shortage’ of properties but in reality people should just refuse to pay more or shop around and move!

  • Paul, Planet Earth

    10. Boris MacDonut

    Oh dear Boris has come onto the Money Week forum spouting the same nonse he did on the This is Money forums before he got laughed off the forum for his obsessive beliefs that HPs would be rising steeply. So which decade do these HPs start rising from, 2007, 2008, 2009, 2010, 2011, 2012 or 2013? you have been predicting the same HP rises ever since, each and every year on TIM and ignoring the obvious as soon was wage inflation rises, IRs rise and HPs fall!…Hilarious!!

  • Paul, Planet Earth

    10. Boris MacDonut

    Oh dear Boris has come onto the Money Week forum spouting the same nonse he did on the This is Money forums before he got laughed off the forum for his obsessive beliefs that HPs would be rising steeply. So which decade do these HPs start rising from, 2007, 2008, 2009, 2010, 2011, 2012 or 2013? you have been predicting the same HP rises ever since, each and every year on TIM and ignoring the obvious as soon was wage inflation rises, IRs rise and HPs fall!…Hilarious!!

  • ken

    boris mcdonut prices will not rise they are going downhill as soon as interest rates rise, and they will when carney gets here in june.

  • ken

    boris macdonut:
    a man who is living in cloud cuckoo land: my dear boris this government will be gone soon, old mervyn will be gone in june, your dream of high prices will be out of the window, house prices will collapse this year i reckon taking you and your silly ideas with them.

  • Alex

    I agree with ‘Tuesday’ – house prices are actually up in my corne of the country. Are you encouraging people not to invest while you do? Do you realise that you predictions contradict the ‘experts’?!

  • Boris MacDonut

    #38 Paul. I wasn’t laughed off, I was banned because I mentioned the very dodgy tax arrangements of the Daily Mail’s owners. I was threatened with legal action if I ever sought to post on a Daily Mail site again.
    FYI , I never suggested HP’s would rise steeply, I merely cast my usual doubt and scorn on those who persist in anticipating armageddon. As it turns out, 3 years on who is right, me or you?

  • Boris MacDonut

    So far this year the ONS has prices up 2.7% and the Land Reg up 4.3%.When is the struggling going to happen?

  • TonyMahoney

    Well this is what i see for most postcodes around my area..
    ..seems to be trending down even with low interest rates… just waiting to see what happens with the Help to Buy …sorry i mean “HELP TO SELL” scheme.

    Im building on my deposit whilst renting and i’ll continue to do so till i can get a v.good LTV on a CHEAP “do-up” house that i can pay off asap.
    I’d rather loose a % on a small house that i can pay off within 5/10years on a fixed rate than something i’d have to commit to for a longer period.

    Small amount in precious metals which i see going lower over the next few months (yes i believe it’s manipulated) before the next “crisis” hits end of this year early next and they begin the upward run again.

    I could be totally wrong but i guess only time will tell….