Investment Insight: Castles in the Sky

I have not written about house prices in these missives before – perhaps because I know that there are millions of strong opinions on the matter already in the UK, most of which are ready to be expressed at a moment’s notice.

However this caveat aside, it’s always puzzling when experts or politicians (very occasionally they are one and the same) talk on the subject of unaffordable house prices. Generally, the only solution proffered to solve the problem is an increase in supply, while the issues this brings surrounding planning etc. are conveniently skated over.

But of course the other solution to unaffordable housing is for demand to fall. This happened in the early 1990s and in the aftermath of the financial crisis. All the arguments about lack of supply, a growing population and the popularity of the South East remained, but prices were actually just a little too high and the house price trees, as it turned out, did not grow to the sky. A read of the latest Royal Institute of Chartered Surveyors (RICS) survey, which came out earlier this month, reveals that something similar may be happening at the moment.

The report notes that buyer demand is falling at the fastest pace since mid-2008. The survey also notes, perhaps unsurprisingly, a lack of demand from buy-to-let investors following the chancellor’s success in extracting more tax from this group.

Additionally, the survey notes that expectations from this, normally optimistic, cross section of the property world, are also rather cautious on the outlook for prices. Respondents to the survey have the most negative expectations since late 2012.

But could it be that an increase in supply of properties or a tightening of the mortgage market is leading to these price falls? It would seem not. The supply of properties coming available for sale has also decreased, with the RICS respondents seeing the biggest decline since the series began in 1999. And this week we saw HSBC offering a rate of just 0.99% for a fixed rate mortgage – a new low for a mortgage such as this in the UK. This is certainly not a sign that it is the price of money putting off prospective buyers.

Not surprisingly, the concerns on ‘Brexit’ are also noted, which, as with the Scottish independence referendum, may be leading to buyers ‘sitting on their hands’ until we get certainty one way or the other.

Pulling all of this together, it is clear that there is not just one property market in the UK and the averages can hide much. However, with London house prices standing at nine times average earnings, there are some areas that are becoming stretched in terms of pricing. Perhaps buyers are now starting to react rationally to this?

There is also, I suspect, an element of a lack of equity in many properties given the array of cunning schemes dreamt up over the past few years to mask the fact that properties were too expensive for most people to afford. This may be leading to problems for many moving up the housing ladder – not a problem widely foreseen when these schemes were put in place.

But as with every problem, there lies a potential opportunity. In this case, it seems reasonable to suggest that it could be the institutional private rental sector, rather than the rather-shaky buy-to-let market. As national and city policy makers grapple with a shortage of housing supply, they will inevitably realise that creating effective rental structures and incentives will form part of the solution. We can all be part of this process, which should benefit residents and businesses as well as investors.

It will be instructive to see what the next survey RICS survey shows once the current referendum is out of the way – but like any market, eventually it gets to a point where people either don’t want to, or can’t afford to pay the price asked – with inevitable results.

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