There won't be another housing crash

Updated on 16 October 2009 | 39 Comments

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 - 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

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