Merryn's Blog

House prices are bound to 'readjust'. But not yet

There is no doubt that Britain's housing market is heading for a 'readjustment'. The only question is when.

I'm having an interesting week. I spent Tuesday flying around Scotland and Northumberland in a helicopter looking at forests and windfarms (more on this next week), and now I am hanging around at the National Association of Pension Funds conference in Edinburgh.

The first was obviously exciting, but the second is more interesting than it sounds. Yesterday, the big speaker was Blackrock's Larry Fink (he's "open" on Scottish independence and thinks private pension saving should be compulsory).And today it was Roger Bootle of Capital Economics, a commentator with whom we have a good amount of thinking in common.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

I had a quick chat with Roger after his talk. I thought you might be interested in his view on house prices. We agreed that while there has clearly been a proper house price crash in much of the UK (the north, the southwest and so on), the average house-price-to-earnings ratio at well over six times is still ridiculously high relative to historical norms.

We agreed that while there are some structural reasons why the ratio might settle at a higher rate than in the past (dual income households being the main one), that absolutely doesn't explain all of it.

Advertisement
Advertisement - Article continues below

If you accept that, you then have to agree with one of two things. Either the historical relationship has entirely and permanently broken down and is of "no value", or the "market is heading for a nasty adjustment". I think we all know which one of these Bootle agrees with. The question is simply when this might happen? The answer is not yet.

That's because with interest rates at their current all time lows (five years this week), mortgage payments as a percentage of take-home pay are just below their long-term average. At this level of interest rates, houses are affrordable.

The government has "thrown everything but the kitchen sink" at this market in their desperate attempt to revive it, says Bootle. They are being and "will be successful".If you own houses or are buying houses, you have nothing to worry about for the "next few years".

However, all good things must come to an end and there is "marked trouble ahead". Right now, interest rates are at their lowest for 300 years. Yet mortgage payments as a percentage of take-home pay are only just below their long-term average. That means that the minute rates begin to rise (Bootle is forecasting late 2015 for this), they will rise above that average: "there is marked trouble ahead".

However, the fact that rising rates will lead to a housing crash, which will in turn have "dire consequences" for everyone from the banks down, is hardly a secret among government officials and economists.

So, Bootle like us doesn't expect it to happen quite like that. Instead, he sees interest rates rising very slowly and peaking out at 3% rather than 5-6% (at which point mortgage payments would be well over 50% of take-home pay).

Advertisement
Advertisement - Article continues below

That would mean high inflation and a falling pound. But it would also mean that anyone holding property would be unlikely to lose money in nominal terms. They'll definitely lose in real (inflation-adjusted) terms. But that never feels quite so bad.

If Bootle was choosing one place to put his own money today, he would, he tells me, choose UK equities. They aren't expensive and rather unexpectedly - he has high hopes for our future growth.

Advertisement

Recommended

Visit/personal-finance/equity-release/600780/equity-release-how-to-tap-your-house-for-cash
Equity release

Equity release: how to tap your house for cash

The pros and cons of releasing equity from your home compared with moving to a smaller one
10 Feb 2020
Visit/investments/property/house-prices/600727/like-it-or-not-uk-house-prices-appear-to-be-rallying
House prices

Like it or not, UK house prices appear to be rallying

The UK housing market seems to be perking up. But that may not be a good thing, says John Stepek.
29 Jan 2020
Visit/personal-finance/600673/act-now-to-beat-the-spring-remortgage-rush
Personal finance

Act now to beat the spring remortgage rush

Many homeowners will see their bills jump in April as competitive mortgage deals expire. Find a new one now.
28 Jan 2020
Visit/investments/property/house-prices/600638/uk-house-prices-may-be-heading-for-a-boris-bounce
House prices

UK house prices may be heading for a Boris bounce

The latest survey of estate agents and surveyors from the Royal Institution of Chartered Surveyors is "unambiguously positive" – suggesting house pric…
16 Jan 2020

Most Popular

Visit/investments/commodities/silver-other-precious-metals/600812/buy-silver
Silver and other precious metals

You should all own some silver. Just don’t expect it to make you rich

Silver is cool, beautiful and immensely useful. But for investors it's the most frustrating of metals. Dominic Frisby explains why you should own some…
12 Feb 2020
Visit/economy/600802/money-minute-wednesday-12-february-grim-times-for-european-industry
Economy

Money Minute Wednesday 12 February: grim times for European industry

Today's Money Minute previews industrial production in the eurozone, plus the latest from America's central bank.
12 Feb 2020
Visit/investments/investment-strategy/600804/the-secret-to-avoiding-being-panicked-out-of-your-portfolio
Investment strategy

The secret to avoiding being panicked out of your portfolio

With the coronavirus continuing to occupy headlines, investors still aren’t sure how to react. But the one thing you mustn’t do is panic. Tim Price ex…
11 Feb 2020
Visit/investments/commodities/600729/the-rare-earth-metal-that-wont-be-a-secret-for-long
Sponsored

The rare earth metal that won't be a secret for long

SPONSORED CONTENT – You can’t keep a good thing hidden forever; now is the time to consider Pensana Rare Earths and the rare earth metals NdPr.
31 Jan 2020