Borrow as much as you can from the bank or building society, get on to the property ladder, trade up every five years or so, and let earnings growth and inflation do the rest.
For successive post-war generations, this used to be the surest way there was to modest, or even quite substantial, wealth accumulation. Even today, after one of the worst economic setbacks of the modern age, it’s proving a remarkably persistent mindset.
Most households continue to believe that, in time, the UK property market will recover, and that, given even more time, we will eventually return to the easy property gains of recent decades.
This belief may, in turn, be one of the reasons why housing transactions
remain so depressed, at roughly half their pre-crisis high and some 35pc
below their 20-year average; those who might sell hold back because they
think that if they wait long enough, peak 2007 prices will again return.
[Related story: Nationwide - No house price rises in 2013]
The brutal reality is that for much of Britain, they won’t, or at least not for many years. This is partly a reflection of the degree of froth that built up in the pre-crisis years. Virtually all advanced economies experienced some kind of a house price bubble, but few more so than Britain. Only Ireland and Spain seem to have had even bigger ones.
If even frontline estate agents are predicting that UK house prices won’t return to their pre-crisis peak until the end of the decade, as Knight Frank did in its new year forecasts, then things must be bad. This is a bit like the stockbroker who forecasts a persistent bear market. It is not something commission-driven salesmen are known for.
Already, this is shaping up to be one of the longest housing market recoveries on record much like the economy as a whole in that regard but if Knight Frank is right, it’s going to be much worse than anything we’ve seen before. In real terms, adjusting for inflation, prices won’t return to their 2007 peak until 2031, says Knight Frank’s head of UK residential research, Grainne Gilmore.
Well, it’s only a forecast, so it should perhaps be taken with a sack full of salt. Yet, to my mind, it looks to be if anything somewhat on the optimistic side. This is not to say that all property prices will continue to suffer. The performance of the UK property market has always been highly localised and granular. If you know what you are doing, and buy in the right places, there will always be money to be made.
In London, prices are continuing to rise quite strongly, particularly in the posher, central locations favoured by rich foreigners. For London as a whole, prices are already back above their pre-crisis peak, and, in certain areas, prices are again rising at rates well above that of ordinary price inflation. Where London leads, the rest of the country has traditionally followed, with a one to two-year lag. Regrettably, this may not be true this time around.
The London housing market is sustained as much by foreign interest as anything else. Chuck in an acute shortage of the sort of properties people want to live in, together with a strong economy relative to the rest of the country, and it’s easy to see why prices in the capital are bucking the trend.One leading international estate agent recently told me that about 60pc of all new-build apartments in London are now sold to foreign investors. As one of the great global cities, London may now be almost wholly decoupled from much of the rest of Britain. Indeed, compared with a number of other global cities, London continues to look quite cheap.
These factors are almost entirely absent outside London, where there is both
limited foreign interest and, in some areas, a substantial stock of
unoccupied housing. It’s not as bad as Spain, where the overhang of vacant
properties runs to millions of units, but then few things economic are quite
as bad as Spain. Sometimes it seems the best thing Spain could do is
bulldoze the lot. It might even create some gainful employment.
[Related feature: Where UK house prices are headed in 2013]
In any case, for much of the UK, it seems that the house-price correction still has some way to go. In the past five years we’ve seen a real terms adjustment of some 25pc to 30pc for the UK as a whole, making this a bigger correction than the early 1990s. Even so, prices remain quite high relative to after-tax income, which is far and away the best way of measuring fair value. Only reluctance to sell at sub-peak prices, and ultra-low interest rates, prevent a more serious, immediate correction.
Meanwhile, real incomes continue to erode, most lenders have scrapped the sort of high loan-to-value deals that used to be commonplace before the crash, and, although there’s been quite an uptick in first-time buying just recently, many young workers continue to regard home ownership as far beyond their reach.
So far, there’s not much evidence of the Government’s Funding for Lending scheme making significant inroads into these constraints.
All things eventually come to an end, so it’s reasonable to assume that so too
must the house price correction. However, there is perhaps a more worrying
longer-term threat to property prices that of demographics. As Matt King,
global head of credit strategy at Citi has pointed out, recent peaks in real
estate prices around the world have in virtually all cases coincided with
similar peaks in the “inverse dependency ratio”.
This phrase refers to the number of people in work relative to those, young and old, who are not working and are therefore dependent on the rest. The higher this number is, the more pressure, logically, there is going to be on house prices. But now, with ageing populations, this ratio is going sharply into reverse. It follows that there will be fewer workers relative to the dependent to keep house prices rising.
In most advanced economies, this coincidence of rising dependency and falling house prices is perhaps too recent to be judged conclusive evidence of secular change, but this is not the case in Japan, which is a good 10 to 20 years ahead of the rest in terms of its ageing profile, and where real estate prices have shown a quite striking correlation with the demographic trend.
In Britain, we seem to be in the midst of another baby boom, and, in any case, relatively high levels of immigration have ensured a better demographic over the next 20 to 30 years than much of the rest of “advanced” Europe.
Even so, dependency is set to rise strongly, reducing the pool of aspiring property owners. As baby boomers die off, or otherwise seek to capitalise on their property gains, there is also the parallel threat of a veritable tsunami of property sales.
Two big conclusions can be drawn. Even taking account of the tax advantages of home ownership, property may no longer be the sure-fire investment it once was. And if that’s the case, it leaves yet another big hole in the UK economy. For, along with North Sea oil and financial services, the housing market has been one of the three big drivers of UK growth and consumption this past 30 years. These are big gaps to fill.