There won't be another housing crash
Neil Faulkner says buy property now.
Now wouldn't 'Cliff D'Arcy says buy property now' have been more interesting? Cliff's been a famous 'bear' for years. This month he argued there's going to be another housing crash very soon.
Although he's the most prolific writer on this subject, others writing for lovemoney.com - such as Ed Bowsher - have professed the same views. I'm not one for making short-term forecasts and consider that forecasts are unbelievably difficult. But in the interests of balance, I'm taking the opposing view and arguing that there will not be another housing crash in the next few years, and that now is a good time to buy property.
To make it easier on myself, I won't argue that we're going into a sustained 'bull' market, but simply that this is a good time to buy property. There's a difference. Furthermore, I'll focus on buying your own home, because buy-to-let is another kettle.
Faced with Cliff's eloquence, and his high-quality research and opinion, my task may seem difficult, yet, in the two-article series I've been granted, I shall posit ten arguments to counter as best I can the thousands of words devoted to the bear case so far...
(...firmly dons Devil's Advocate hat...)
Argument 1:
Cliff D'Arcy is biased!
Wait, I can do better than that. Sorry, old man. I'll buy the beers in two weeks. I'll try again, if I may...
Argument 1b:
This is no spring bounce
I'm surprised how many strong arguments I can develop for buying property now. To start with, Cliff said that recent rises shown in Halifax's house price index are just the normal 'spring' bounce. However, Halifax's figures are 'seasonally adjusted', which means that seasonality is stripped out -so that increase was no cyclical bounce!
Salary multiples are reasonable
Some argue that the cost of housing as a multiple of the average salary is still too high, at 4.3 times income. Normally, it's closer to three times income. However, I've looked at as much data as I can. (We only have good-ish data for the past 30 years or so - that's a short time!) And I think that four times income is historically more 'normal'. And times change...
- Those figures are based mostly on men's full-time earnings, yet women's incomes are rising significantly.
- Families are starting later, meaning there are two full incomes for longer and there's more time for promotions (and more pay) before a family crops up.
- More people are graduating. Figures continue to show that greater education pushes up overall earnings. Astounding, given that there are ever more graduates.
To put all this another way, Halifax projects we're spending around 30% of our incomes on housing. And, historically, this is below average.
Argument 3:
Base rate to stay low
Highly-regarded economic analysts, such as IHS Global Insight and the Centre for Economics and Business Research, predict that the base rate will stay low for some time, meaning fewer forced sales from hard-pressed homeowners. IHS Global Insight expects the base rate to stay level until the last months of 2010 and the CEBR does not expect a rise until 2011 and predicts the rate will not reach 2% before 2014. That's five years.
Many bears would now argue that 2% means the base rate quadrupling, yet in pound terms the average person will just pay an extra £150-£200 per month. Since rates are so low, most people must (surely!) be accounting for an increase in bills in the next few years.
Argument 4:
Mortgage rates are to stay low
Despite much recent opinion to the contrary, mortgage rates are still very much connected to the base rate, even if the distance between the two has widened. For those who are unconvinced, economists and recent history suggest there will be lower mortgage rates anyway!
Macroeconomic thinktank, Capital Economics, foresees continued low mortgage rates if the next government cuts spending, which seems likely, because that means a weaker economy and lower tax revenues.
As the Bank of England predicted a short while ago, mortgage rates are being cut now, despite the base rate staying the same. Plus, as many as 100,000 per month are coming off deals onto even cheaper standard variable rates, which means more overpayments and fewer forced sales in future.
Houses are a store of value
Property is a better store of value than money. Think about it. You can print more money, which makes it worth less, but you can't easily print more houses. And we've been printing a lot of money. Putting a large chunk of your savings into your own property is a good safety against the possibility of high inflation. You'll struggle to match inflation by moving cash from one top savings account to another during rapid inflation!
Property's a good hedge in another way, too. If interest rates surprise and rise quickly, it will likely be to combat inflation. Higher interest rates could result in a temporary real fall in house prices, but inflation will mean a permanent real fall in the value of your mortgage!
Tune in next week for my other five arguments...
More: Property prices to stagnate in 2010 | Soapbox - getting through the mortgage maze
Use lovemoney.com'sovative new mortgage tool to find the best mortgage for you online#
Tell us what you think will happen to house prices in our lovemoney.com property poll.
Most Recent
Comments
-
[b]bungalow said:[/b] [b]I know I can buy a flat for maybe £21k in Germany but the tenant security & low rents still makes the investment look poor.[/b] The Germans treat land as a national asset and therefore grant tennants an approprate level of security, which is commenseurate with this. They are also (as a country) a lot more productive than us and don't seem to subscribe to the idea that extracting money from people in return for doing little or nothing is a good thing. In other words, they seem to believe that if you want money then you have to work (be productive) for it. [b]SevenPillars said:[/b] [b]I'm happy to stand by the assertion that access to funding is everything in the UK housing market. Prove me wrong.[/b] I agree completely. House price arguments tend to be carousel-like. Just as you finish off the same old arguments, they start again. Demand for housing is infinate but there isn't an infinate supply of funding, so this rather than supply is the limiting factor.
REPORT This comment has been reported. -
[url=../../profile/profilehandler.aspx?uid=18821][b][/b][/url]JimboMahoney 1) The obvious driving factor in house prices is demand. 2) More people = more demand and vice versa. ------------------ I think this is far too simplistic. While demand is clearly important a willingness to finance the market, especially when prices get out of synch with traditional lending criteria is clearly just as important if not more so. Up to 2007, this was no problem as banks threw money at anyone with a pulse. Today we have the news that the FSA is finally going to police the market, that self-cert is dead, so where does the funding come from now given that by the bubble peak in 2007, almost 50% of lending was of the fast track, no-income check, open to fraud self-cert type mortgages? Assuming the FSA now does its job and doesn't give in again to the VI's (as it did in 2004), the UK housing market is now officially dead as it is clear that current price levels which were achieved during those loose lending, fraudulent boom years from 2000-2007, cannot be sustained by real income levels. The market can now go one of two ways. The first is that the market VI's will try and keep house prices at current levels, but this can only happen on much lower sale numbers for years to come as banks will only want to provide funding for those with provable relatively high incomes and big deposits. Alternatively, if we are to ever get back to the level of sales seen between 2000-2007, 100,000+ most months, then prices will have to fall back to affordable levels based on real incomes because clearly the fast track, self-cert option that was available to these type of buyers during the boom is now dead. I'm happy to stand by the assertion that access to funding is everything in the UK housing market. Prove me wrong.
REPORT This comment has been reported. -
I know I can buy a flat for maybe £21k in Germany but the tenant security & low rents still makes the investment look poor. So the prices [i]are [/i]high for the return on investment. Even if land is cheap. Land prices are much lower in the north of the Uk of course that the silly south and a decent 4 bed det starts at £150k here so that is 6x the average single £25k income and the cost of undesirable second hand homes is below build cost at £40k is about 1.5 times. I know to rent out in the south I'll be lucky to get better than 3% return on investment but buying at sub £40k and renting at £100 a week here is better. none of the above is I think unaffordable. I know that a similar house to the £150k in say Epsom would be say £400k maybe £450k and I know that my salary would not be 2.5 times so you are looking at a single income muliplier of 12 ish Yes that is unaffordable. I am just saying the north and South are different countries I couldn't operate in the south, and find it difficult to understand why people try.
REPORT This comment has been reported.
Do you want to comment on this article? You need to be signed in for this feature
20 October 2009