House prices are invincible
House prices continue to defy logic and rise - are they simply invincible?
Perhaps the most astonishing thing about the credit crunch is the relatively mild impact it has had on the housing market. Prices did fall by around 16% as the UK tipped into recession, but forecasts of a 30% or 40% drop were well wide of the mark.
Amazingly, they have even started rising again, notching up an impressive 8.7% growth over the past 12 months, according to the latest figures from Nationwide. In some areas, prices have almost hit pre-crash levels, which is frankly ridiculous.
It’s as if the global economic crisis never happened.
The financial crisis has eaten wealth. It has chewed up pensions, savings and salaries, swallowed the stock market and spat out jobs. But after taking a nibble out of British house prices, it has left them alone.
Which is driving me to the surprise conclusion: the UK property market is invincible.
High hopes of low prices
When the credit crunch first struck, I expressed my hope that if one good thing could come out of the crisis, it would be an affordable housing market. One where young people could get on the property ladder without having to make a Faustian pact with a 125% mortgage, and where buy-to-let was seen as a solid, long-term investment for committed landlords, rather than an unseemly get-rich-quick scheme.
John Fitzsimons looks at the costs we forgot to consider when buying a property.
It didn’t happen. It may never happen. Prices are on the march again.
The long-term UK house price-to-earnings ratio shows the average home cost four times average salary. In 2007, the ratio peaked at 6.5 times salary. After dipping to just under five times salary, it has started climbing again.
That wasn’t supposed to happen.
Three-quarters of first-time buyers still find house prices off-puttingly high, according to new research from currency service Moneycorp. Crazily, one in four are considering buying their first home abroad in the hope of getting better value for money.
The UK property market isn’t just invincible, it’s irrational.
More people, fewer homes
Although not wholly irrational, because it still conforms to the laws of supply and demand. After all, the population grew by an extra 394,000 people last year, and they all need somewhere to live.
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The UK population is projected to rise to 70 million by 2029, up from 62 million today. Yet fewer new homes are being built than since 1924, which should also help sustain prices.
Low interest rates have done more than anything else to prop up the housing market, and with the Bank of England determined to keep rates low for as long as possible, they could underpin prices for years to come.
That will help cash-strapped homeowners hang onto their homes, preventing a mass sell-off and subsequent price dip. New figures show that repossessions fell to a two-year low in the first three months of this year, to just 10,500.
Another factor is that homeowners rather like high property prices, and once they have been given some ludicrously-inflated valuation, they won’t settle for less. Many have stayed put rather than sell at a reduced price, which has helped choke off supply.
It’s almost as if homeowners are keeping house prices high as a sheer act of will.
Jobs down, house prices follow?
UK property is one of the last global financial bubbles that hasn’t gone pop. Which is amazing, when you consider the low quality of our housing stock. Houses in this country are like the English football team. The quality is abysmal, but they command a small fortune.
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That’s not to say prices won’t come under pressure. Up to 120,000 public sector jobs and 140,000 private-sector jobs could disappear annually for the next five years, according to leaked figures from the Treasury. That’s 1.3 million job losses in total, which could undermine house prices, as will rising taxes and falling state benefits, by making everybody feel poorer.
But while existing jobs may be lost, new jobs may also be created. In five years’ time, the UK will actually end up with an extra 2.5 million more people employed overall, according to the Office for Budget Responsibility.
Some of them might like to buy a house.
Plenty of people will tell you the property market is finally facing its Waterloo. Some of them are called Cliff D’Arcy and write for this site. They will say that Chancellor George Osborne’s emergency Budget in June is the bayonet charge that will finally break their resistance. They will point out that price growth slowed to just 0.1% in June, compared to 0.5% in May, according to Nationwide, and is expected to slow further.
With stock markets plunging and the world on the brink of a double dip recession, surely house prices must finally surrender to the inevitable?
It could happen.
To a degree, I still hope it does. If the credit crunch slashes salaries, jobs and GDP but fails to cut house prices and banker bonuses, then it really has been a waste of a crisis.
But given the resilience of the house prices so far, and the soft long-term outlook for interest rates, there is a good chance that the property market will continue to sail on, the HMS Invincible of the UK economy.
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