Don’t pile into property in 2018

To let signs © Getty images
Now’s not the time to put your money in property

What’s the best possible thing that could happen to UK house prices? Your immediate answer will depend upon your own situation. If you have recently bought with a whopping great mortgage, you will want prices to rise. If you are planning to downsize, you will also want them to rise (you are interested in the cash left over after the move). If you have a good slug of equity and plan to trade up, you’ll want prices to fall. The percentage fall of the cheaper house you occupy will cost you less than you will save from the same percentage fall in the more expensive house you want.

Whereas if you want to trade up, but have very little equity, you’ll want house prices to rise (deposit, deposit, deposit). If you care more about your kids buying an affordable house now than leaving them an expensive one to inherit, you’ll also want prices to fall. And of course, if you are renting or “kidulting” with your parents in your childhood bedroom, you will most definitely want them to fall — right now and very fast. However, the best thing that could actually happen to house prices in the UK is… nothing at all.

If prices stick where they are for, say, five to seven years — or at least rise by 3% less than inflation — they would gradually revert to their historical averages. The young would gradually find property more affordable, particularly if the tight UK labour market causes wages to rise at the same time. Flat prices plus rising incomes equal more affordability (and hence less intergenerational inequality). So the young would be happier.

It would also be fine for those with mortgages, however large. Inflation would still be eroding the value of their debt over the long term. Watching house prices fall in nominal terms can be very traumatic for mortgage holders and those who judge their wealth by the value of their house. Seeing prices stall — even if you know they are falling a little relative to inflation — is a less troubling feeling.

Overall, the only group that would be much bothered by flat prices is the group we need worry about least — buy-to-let investors. Many rely on fast capital gains to boost returns as their rental yields are ripped to shreds by changes to tax relief, rising stamp duty and a renewed focus on tax evasion in the sector. A scenario of flat prices sounds pretty good to me. So much so that when we talk about flat prices it might be a nice idea to stop using the word that the property industry favours — stagnant — and use something less miserable instead. How about stable?

So what are our chances of having stable prices and all the fabulous social and economic gains that might go with them in the UK? Not quite as bad as usual. At the moment, all the main house price indices suggest that average prices are either growing very slowly (low single digits) or falling slightly — the latest from the Halifax suggest a 0.6% fall in December. Mortgage approval and transaction numbers are fairly flat. Surveyors are reporting slight falls in buyer demand, with London and the Southeast seeing the sharpest declines. And the number of months’ worth of unsold stock per surveyor has also risen slightly across the UK, meaning it is taking longer to sell each house. Add it all up, and even the UK’s endlessly bullish estate agents can’t quite bring themselves to claim that 2018 is going to be a bumper year.

Most are forecasting average price growth of 1% to 2% in the next 12 months. I’m loath ever to agree with an estate agent (more this week than ever, given the experience my sister has just had selling her house). But these are perfectly reasonable forecasts. Employment is high, wages will rise and the government’s maddeningly stupid Help to Buy scheme is still in place. But prices are already very high and mortgage rates are not going to fall any more (the average two-year fixed rate according to Moneyfacts is now 2.35%, up from 2.2% in October).

There will be regional variations. Prices will probably go up in the Midlands, home of reshoring and the UK’s manufacturing resurgence, but down in London, where properties are used as safety deposit boxes. So it makes sense that the overall price rise over the next few years should be about zero — at a time when inflation is running at about 3%. Perfect!

What could stop this from happening? First, interest rates. Inflation is returning all over the world — and while I have expected the interest rate cycle to be on the turn every year for the past few, it really is turning now, and this is something that could give us a nasty correction. If the cost of the money you need to borrow to buy a house goes up, the price you can pay for a house tends to fall. At the same time, from an investor’s point of view, if you can get a reasonable yield from something liquid and easy to trade such as a bond, then why bother with houses?

Second, politics. The current government has made it clear that it isn’t into particular types of property owner (buy-to-let investors and second-home owners in particular). But were a Labour government to take power, this would introduce a whole new dimension of risk in the form of very fast-rising interest rates and the potential for new property-related taxes. The Labour manifesto promised to explore the idea of a land value tax, and it’s probably safe to assume rising rates of capital gains tax too. An election followed by a Jeremy Corbyn victory would, I suspect, make pretty much everyone yearn for “stagnant” house prices. Anyone wanting the UK property market’s rebalancing to be gentle should maybe hope there isn’t one.

One final point on property. Given the likelihood that prices will at best be stable in the UK, now is not the time to invest heavily in it. The same is probably true everywhere — the interest rate turn is global. But you might make a note to do so once things have settled. Halkin Research pointed me to a report just out from the San Francisco Fed which looks at returns from all asset classes back to 1870. Its conclusion? The long-term average real returns on global housing and global equities have been much the same — the difference being that housing has made its returns with less volatility. Assuming Britain’s new fashion for socialism doesn’t spread around the world, all portfolios should, it seems, one day have a global residential property fund in them.

• This article was first published in the Financial Times.

  • Adam

    Can anyone think of a time when MSW has called a time to buy Property?

  • AAJ

    If you need somewhere to live, they when you look at the price of renting against the price of buying then the price of buying can often look better. If you are buying as an investment then this is different. I have just bought a property, I plan to live in it and if the price doesn’t go up more than inflation then that is fine with me.

    • pyradius berning

      In a pure LVT system (100% LVT, no taxes on other sources) people would ultimately keep a lot more of their earnings, and the rental value of land would be much more in line with the natural opportunities of a given location.

      Population growth would likely be fairly gradual if all locations did this. If you tied a Land Value Tax to an unconditional basic income for everyone this would eliminate a lot of cost of living concerns.

  • AD

    Why does someone with a small deposit want house prices to rise? if they need to buy a bigger house at some point they will be worse of regardless of the size of their deposit on the first place I would have thought?
    For me it seems that about 90% of the population want HP to fall so that they and their children find it easier to get a larger exposure to property. I think a 5% nominal fall per year for next 5 years would work out about right, not 0%.
    Will never happen of course, as govt would just introduce another demand side relief paid for by taxpayers (help to buy, stamp duty cut, inheritance tax cut etc).

  • DemiSapien

    Prices tend not to stay flat, although, slightly wishfully perhaps, I like the argument that they might as a number in GBP remain steady. But they won’t if measured in USD that is for sure, so investment at least is sure to seek alternatives until GBP is deemed cheap again.

  • Brucie

    Sorry, I’m about to wind up quite a few people !
    Property is a completely unproductive asset despite which a ludicrous proportion of available capital has been diverted into buying it – why? Banks consider it low risk because their loans are secured against the property which they see as a safe asset so they lend even more, resulting in even higher prices which, in turn, makes property ownership even more difficult. No wonder the younger generations are so pissed off.
    What’s the solution? How about a 50% crash? The banks would learn the hard way that lending on property wasn’t, perhaps, the sure fire bet they always thought it was & so divert capital to potentially more productive assets such as small businesses which would be good for the economy, the young would suddenly find property more within their reach but would be more cautious about over extending themselves, the old (that’s me) would find their house halve in value – but so what, I’ve done absolutely nothing to merit the huge capital gain I’ve received by dint of my age (& it’ll be worse in London) & I’m mortgage free. That leaves us with recent purchasers who will suffer a fall in value but still have a “home” (isn’t that what houses are meant to be?) to live in which, relative to others, is as valuable as ever it was; in fact trading up will become easier. The real sufferers would be those who borrowed far more than they could afford if interest rates go up … but with a 50% decline in property prices, I don’t think that’s likely somehow ?!?

    • disqus_x5UmkDRb7H

      Brucie,

      If property value/prices fell by 50%, then a number of things would happen. Anybody with less than 50% equity in their property – a lot of people – would move into negative equity. Banks would ask for money to reintroduce the householder’s deposit as your interest rate is related to the amount of deposit/equity you front up and if it was not forthcoming they would increase interest rate to compensate for added risk and/or reclaim the property, making a family homeless.

      The release of all these homes onto the market would depress prices further, exacerbating the problem until we reached a new equilibrium. Homeowners with no mortgage would not be affected, those still to buy would benefit, but most people are in the middle and would suffer. And vote.

      Personally, I have debt, but would be fine as my debt to value is only about 20%. Alternatively, 5 years at zero price rise would take almost 20% of the real price. A safer, more stable solution

      • Brucie

        I agree with a lot of that. Banks would, indeed, fight like “stuck pigs” to introduce a new buffer, however, if the mortgage is still being paid there should be a way of stopping them from enforcing it. It would also be in their interests to live with the situation because the last thing they would want is to create a situation where even more are pushed into negative equity. The key, for me, is that houses should be considered homes not investment assets, for a time, back in the 70’s I lived with negative equity, nobody came gunning for me &, as we considered the house our home, we just kept on paying the mortgage.

        • nickwh

          Personally, I agree with your synopsis. The problem is that a vast number of folk look at their wealth through their property price(they shouldn’t but they do). When property prices drop, the government gets the blame and gets shunted out at the next election. Politicians thus try to game the system by gentle depreciation or appreciation rather than a crash.This was one of several reasons of what happened during the 1992-4 property price drop when lots of homes were re-possessed by the banks. The banks were not very good estate agents either. Plus they didn’t value the homes at market rate but at what they were originally purchased for. Took them ages to get rid of it all. Needless to write that the banks should have learnt their lesson from this but I doubt that any of the generation involved are still around in the banks.

  • Andrew Crow

    “….you will want prices to rise. If you are planning to downsize, you will also want them to rise (you are interested in the cash left over after the move)….)

    This is bollox, Merrilegs. You are just perpetuating the myth that rising house prices are a good thing. Sure, if you are prepared to downsize from a desirable area to a slum you are quids in, but rising prices make little real difference to that equation. You can do that move any time you wish to and cash in your equity.

    Location, location , location, they say. If you don’t care about the location there are plenty bargains to be had. The more people want to downsize to somewhere nice the less spare equity you can win.

    I’m told Rochdale has a lot of potential.

  • Gary

    If you need a house and are in a position to buy now then do so unless you are buying cash. House prices have historically moved on the parameters of affordability. Less in terms of the value of the house and more in terms of the buyers cash outlay. Interest rates are low so buyers can afford bigger mortgages and so can pay higher prices which supports price growth. Values will only fall significantly when interest rates rise significantly. When they do, buyers will find their monthly payments will not go as far so buying later will still cost you the same in cash terms as your interest payments will be higher. Over the long term 10 years plus prices will always be higher. They have been since records began and it will always be cheaper than renting.Buy now, offer below the asking price, as there is an air of uncertainty in the market which helps, and fix the interest rate for at least 5 years.