Merryn Somerset Webb: Let’s start with the level of the market. Where are we now?
Ed Mead: I wish people would talk more about house prices in real terms. There is much talk about how we are back to the last peak. But that peak was seven years ago. Add in inflation and prices are still substantially lower than they were. More so outside London.
But even in London, look at the long-term charts and you will see that prices are more or less on their trends.
James Wyatt: But what is long term? That may be the case over the last 15 to 20 years, but look back a minimum of, say, 60 years and you will only be looking at long-term growth of maybe 0.5% to 1% a year.
Ed: But it’s not realistic to go back 100 years or 600 years, is it?
James: It is. In fact it is absolutely necessary. We are all prisoners of our short-term memory – we believe what happened yesterday will happen tomorrow. But we are now five-and-a-half years into the ‘temporary’ emergency measure of having a bank base rate at 0.5%.
We have experienced the largest credit bubble in history, one that has been building for decades, and the deleveraging is going to take years. We can’t just look at what has happened in our careers.
Look at prices too – nationally house prices remain overpriced according to fundamental measures, such as the house price-to-earnings ratio. So either house prices have to fall or earnings have to rise.
Merryn: How much?
James: The ratio’s long-run average is 3.8 to four times annual earnings for the average property, depending on where you start from, and we’re at maybe 5.5 to six, depending on which measure you use.
Merryn: And if you take London and the South East out, where are we?
James: It’s even higher.
Phil Anderson: What earnings numbers are you using?
James: The annual survey of household earnings from the Office for National Statistics – so two salaries are already factored in.
Russell Quirk: I’m still not sure the 1950s are statistically relevant. I mean, the world is changing by the minute in terms of technology and media. Look at how the media ignores wider house prices in the UK and just talks about London. It has moved from reporting to driving prices. It’s a media-hyped property market.
Merryn: Do you genuinely think that articles in the media about house prices can move house prices?
Ed: Yes. That’s all your fault!
Merryn: If I was driving them, they’d be lower, not higher.
Phil: I don’t think the media can have any effect except for at the margin. It is all about certain fundamentals and cycles seen time and time again. That’s all – nothing else.
Jeremy McGivern: The problem is that you’ve got huge political interference that is distorting the cycles. How can prices not react to quantitative easing (QE)? All this money changes things. That’s particularly true in London. It is now one of the few truly global cities and, as such, UK earnings have no bearing on its prices.
Ed: But London has always been expensive. For goodness sake, even Samuel Pepys complained in his diary that London was expensive.
Russell: Yes, my grandfather wrote a piece in 1948 as a London surveyor on exactly the same thing – how London house prices must be controlled. I still have the article.
Phil: But we are global investors now. Looked at by an Australian in 2010, London was one of the cheapest markets in the world. Currencies matter too.
James: Prices in 1948 were a result of the reflation in the 1930s. The government pumped money into the economy, and it led to a housing boom in London and the South East throughout the late 1930s, one that carried on until it dropped after the war, as they started to deleverage.
The point here is that economies are driven partly by political will. So now the government will try to deflate our asset bubble by gently encouraging inflation over 20, 30, 40 years. It is the only politically acceptable solution. That’s why it is real, not nominal house prices, that I worry about.
Russell: I think politics has played a greater short-term role than that. Look back at the property market in London two or three years ago – it was in the doldrums. The government realised that it was only going to win the election on the economy.
What did it do? It launched the Help to Buy scheme, with the pretence of helping out first-time buyers. There have been only 45,000 participants, but still the hype has caused the housing market to accelerate. It is all about re-election.
Jeremy: Of course, if you really wanted to level the playing field for first-time buyers, you’d do something about buy-to-let investors: you stop the tax rebates they get so as to stop them from buying up so much of the market.
Instead of new policies, we need to get rid of earlier idiotic policies. Pushing prices up doesn’t help get people on the housing ladder.
Merryn: But is removing the tax benefits from buy-to-let that difficult politically? Only a small percentage of the population are buy-to-let investors. Take away the tax rebates, and property prices would fall and everyone would be pleased, problem solved. Is it that big a deal?
Russell: Yes – they don’t want a reduction in demand and falling prices.
Merryn: The other way to bring prices down is to put rates up.
James: Basel III [the next global financial regulatory regime] doesn’t kick in till 2018, so we’ve got another three years at 0.5% interest rates. Minimum.
Ed: The problem for Messrs Cameron and Osborne might be that they have slightly messed it up, because the chances are that house prices will be falling by the time the election comes along. They wanted to keep prices up until, say, June next year, but it is happening already.
Phil: That’s a blip. The truth is that we have not yet even begun to see house-price rises start in this cycle. They haven’t even started – so far all they’ve done is recover. You have got to look at history – hundreds of years of it. Every 18.6 years there is a boom and a bust.
You get four years down first. Then you get seven where house prices go nowhere. That’s because no credit has been created – banks are rebuilding their balance sheets. That’s where we are at the moment, about halfway through the first seven years.
You then get a big cycle slowdown. This is going to happen in 2019 – so between 2019 and 2021 we will get a slowdown in most parts of the world. Then finally you will see an explosion in house prices because the banks simply have to make profits. There’ll be more lending – it’s just the cycle.
This is also the point in the cycle where you would expect policy change to help the market from the government – as happened here in 1975-1976 with the huge government-led operation to refloat the high-street banks. And again in the late 1990s.
Russell: The first buy-to-let mortgages were introduced around that time.
Merryn: And the equivalent political environment now is what? It’s Help to Buy at similar low interest rates.
Phil: Well there is a direct tie-up between governments getting re-elected and the price of a house. No question.
Russell: Has a cycle ever seen this level of debt?
Phil: I’m less worried about the debt. Just as in the 1970s, we can inflate it away, and QE means governments can actually start rolling over their debt. They can start issuing bonds at 1% or 2% and use that money to pay off the bonds that are at 3% or 4%. It’s good sense.
This is going to re-float the system, because it’s going to save huge amounts of interest and that will just, I think, kick off the cycle even more.
Jeremy: The argument against this is demographic, surely. With the baby-boomer generation hitting retirement and paying down debts you have a massive deflationary impulse. How do you counter that? Just with the idea that inflation is the only solution and it is therefore inevitable?
Phil: It is this deflationary state of affairs that will allow the banks and the government to get away with what they’re doing, which is printing money to deal with the debt. The other thing to look at with the way the cycle works is that it is often refloated by one or two things – massive technological development or an energy boom, one or the other.
This kind of development goes in waves, but we’ve actually got both happening at the same time. This is massively, massively productive for the world.
Russell: I take it that your view, in terms of the current decline that we’re seeing in the market, is that it is absolutely just a blip? Like in 2004, 2005?
Phil: Things never go in straight lines. There was a real buyers’ panic earlier this year – that has to cool off.
James: I’m not convinced. Outside of central London, houses are paid for out of earnings. So, yes in real terms they must fall. It’s just a truism. It’s just a mathematical relationship. Global governments might win the inflation war and push them up in nominal terms, but not in real ones.
Merryn: Even in London?
Ed: The deepest and most liquid and transparent, legally sound place to put your money into property is London. You can put your money in and you can get your money out. That backstops prices. In fact, I think London prices are quite cheap at the moment. We think they’re going to double in the next ten years. We don’t think this is anywhere near the top.
Jeremy: In the four or five months past, the politicians have made it slightly less safe by talking about the mansion tax. Markets hate uncertainty. At the same time, buyers have reached a limit of price elasticity – they aren’t stupid.
Merryn: Surely, with the possibility of a mansion tax and the recent changes to the Tier 1 visa rules (you can’t buy a big house and get automatic UK residency anymore), the direction of travel for foreign investors in property is clear? It isn’t as safe as it was. There will be property taxation of some kind and that has to affect prices.
James: The national debt will have increased by around 85% during the current parliament, and whichever political party wins the election, they will be forced to raise taxes. The most popular tax will be a mansion tax, as by hitting properties over £2m it will not affect 99.9% of the population. It is the politics of envy.
Ed: The London market is pulled from the top down – everyone wants to move up to impress their friends. They aren’t moving now. You cut the top, and everything falls down – and that is exactly what’s happening at the moment. Sales above five or ten million – forget it. Things over two million? Forget it.
Jeremy: It’s affecting our core market in London. But the people who live in Bradford, Birmingham, Barnstaple, Bromsgrove, and so on – are they going to be affected by the mansion tax? No, they’re not.
Merryn: Well, they will be in the end. So you are all mildly concerned about short-term prices in London, but not bothered about long-term prices?
Ed: Not worried at all. If you bought, say, in a sealed bid in Fulham in May, at the top of the buyer frenzy, you may be sitting on a 15%-20% nominal loss. Fulham prices had gone up by 40% to 45% in the space of 18 months. It had gone too far. But the people who have just bought those houses have no need to sell.
Look at the number of properties being withdrawn from the market at the moment because prices aren’t reaching buyer expectations. It’s a discretionary market – mostly people don’t have to buy or sell.
Phil: I don’t think I’ve ever seen so much regeneration happening in London: King’s Cross, Nine Oaks, Greenwich, Stratford.
Merryn: But there’s an awful lot of supply coming on at the same time.
Jeremy: I do think the supply issue is a really big problem. My understanding is that Battersea Power Station hasn’t been anywhere near as successful as they say – people are just not paying.
There are 16,266 apartments being built in SW8 alone, all coming online in 2016, 2017. That’s too much property without domestic demand for it – which there isn’t at these prices.
Merryn: Would any of you buy a house now, as an investment?
Russell: No, I wouldn’t buy a house, I’d buy a flat. But not in London. The yields are far too low. There’s a vanity about buying in London, but you have to rely on capital gains alone for a return.
I’d look in the Home Counties or in other major cities – anything that’s reasonably commutable. If you look at Crossrail 1, Crossrail 2, HS2, anything that’s within an hour, an hour and a half of London, has to be a better bet.
Merryn: The north?
Phil: Historically, the start of the cycle happens at the big centres, like London. Then, as you go further into the cycle, it ripples out once more credit becomes available. Then once you get to the second half of the cycle, historically, those areas that will see the largest price rise will be the lower working class areas. They’ll double. And at the end of the cycle those areas also see the biggest decline.
Jeremy: It’s also about where the international money goes: if the politicians in India and China relax exchange controls, then London is great. But there is also interest from Chinese buyers in the likes of Birmingham. Compared to London, these cities are very, very cheap. I was in Beijing three months ago and there’s unbelievable demand.
Merryn: Phil, where would you buy now?
Phil: I’ve been buying, or have bought, in and around Stratford. I’ve made amazing gains – about 80% just around Stratford, Leytonstone, around those areas. From my point of view I think the area to be in at the moment would be development. I think there’s great scope for finding places that can be developed and added to – I’m talking one bed to two bed, two bed to three, for example.
Ed: I wouldn’t buy in prime Central London, because I just think it’s got quite dull. I think Central London is just not a place real people want to live.
So instead, I’d buy in Hammersmith, Fulham and Wandsworth – the areas where the aspirational actually want to live. You could even go the other side of Harrow Road.
James: The other thing to think about is the disparity between London and the rest of the country. Property Vision often looks at this in its newsletters – 15 years ago if you could sell a house in, say, Scarsdale Villas, Kensington, you would be able to afford to buy a Georgian rectory in Somerset, say. Now you can get two.
The gap is getting wider. A middle of the road house in London buys great houses in the country.
Jeremy: That’s because there are only British buyers in the country, so the market above £600,000 is very difficult. It is all about different price strata. It’s the same in London.
Prices might look like they’ve come down and the price of actual houses has underperformed because foreigners don’t want them. The number of transactions in the last year has fallen by 55%. But go to a good block of flats in Knightsbridge and the prices are still up. That’s why people need a good agent!
James: The number of transactions is also affected by the fact that the actual cost of moving is so great these days. Jeremy and I were talking about this earlier – people just aren’t moving.
Personally, I would abolish stamp duty, as it makes the price of moving just too high for most people. It discourages mobility of labour – an economy needs a flexible workforce.
Russell: Of course, that’s one of the advantages of renting – you can move as you like.
Phil: People shouldn’t buy the house they live in. You buy an investment, but you rent a lifestyle. It makes more sense – unless you are Conservative politician: people who own their house tend to vote more conservatively, so they’re always going to be pushing for higher home ownership.
Russell: House prices rise at double the rate under a Conservative government than they do under Labour in the UK – although the second greatest prime minister for house-price growth was Tony Blair. There’s also always greater house-price growth in the 12 months before the election than after.
James: Ironically though, the worst government since the 1960s for housing supply is this one – 135,000 homes built per year. In the 1970s, 365,000 houses were built each year. Blair left it at about 190,000. Eric Pickles is the most unsuccessful secretary of state from that point of view.
Phil: You can’t get more new builds until it’s cost-effective for developers to do that. The only way that happens is when it’s more cost-effective to build than to buy established houses. So, as established houses continue their rise, which they’ve done over the past three or four years, you will find developers start building. That’s when you get a rush.
Merryn: Thank you. (See the box above on the right for our panel members’ house-price forecasts for the years ahead – in nominal rather than inflation-adjusted terms.)