Cast your mind back to the late ’80s. The chancellor was changing the tax breaks on mortgages taken out by couples and there was a rush to buy a home. House prices became artificially inflated, and then the rate of interest started to rise, and crash went the market.
The question is this: is there any danger, or for that matter, if you re a first time buyer, – hope, that this process will repeat itself?This time, though, there is no artificial factor propping up house prices; it’s all down to supply and demand, and the low rate of interest.
Interestingly, a recent survey carried out by Abbey, which said there are 17.3 million adults who are not currently able to get on the property ladder, revealed that of this total, 6,876,000 say the factor holding them back is not that they can’t afford the mortgage payments, rather it’s they can’t rustle up the deposit. In a way then, this would imply there’s pent up demand, and as mortgage lenders start lending out higher and higher income multiples, as they appear to be doing, or as parents lend the money to first time buyers to pay for the deposit, by topping up their mortgages, (and there is evidence to suggest this is happening too) the demand for property would seem likely to grow.
But then, an even higher number of people, or so Abbey reckons, are being held back by the cost of the mortgage. The same survey indicated that 7,404,000 said they simply could not afford the house prices in the area. Also lurking in the Abbey data was one fascinating piece of data; that 3,365,000 are waiting for prices to fall.
Other reasons cited for not moving onto the property ladder include: “Don’t want the commitment right now” (5,612,000); “Job is not secure enough” (2,963,000) and; “Don’t know where to start the house buying process” (2,585,000). Meanwhile, two a half million of us are apparently just too busy, with “not enough time” also showing up as a popular reason not to buy.
It’s not surprising First Time Buyers are finding things tough. According to AllianceTrust, the ratio of house prices to income has risen by an average 60% in the UK between 1970 and today.
But if house prices are out of reach for First Time Buyers, there’s no sign of a let up to the growth in prices. According to Hometrack, in the 12 months to October, average house prices rose by 4.9 percent. That, says Hometrack, is the fastest annual rate of house price inflation since August 2004. Perhaps the problem is that while house prices move upwards, so does the cost of renting, with research carried out by Nationwide recently finding that with a typical loan-to-value ratio for a first-time-buyer of 90%, mortgage rates would need to increase to around 7% before monthly outgoings on a mortgage exceed rent.
As for the last ten years, according to data released by the Halifax yesterday, house prices have risen by an average of 187% across the UK since the housing market recovered in February 1996. The average UK house price has risen from Â£62,453 in Q1 1996 to Â£179,425 in Q3 2006 – an average increase of 10.6% per annum.
The truth is, while FTBs are being squeezed out, Buy to Let investors, who are not so hampered by the barriers to raising the mortgage, (they can, after all, borrow against the capital gain they have enjoyed in other properties in their portfolio) are moving in. And the Halifax research gives a good reason. Apparently, while house prices have risen on average by over 10 percent a year since 1996, the stock market grew by a mere “4.6% p.a. Nominal earnings increased by 54% or 4.2% p.a., while retail prices rose 31% or 2.6% p.a., says the report.
And yet… we know that in recent times the resurgent market has been led by London and the South East. The booming capital, and the city types with their fat bonuses, not to mention the influx of well paid immigrants into the capital, are helping lift house prices upwards. But maybe there are signs this is coming to an end. According to Hometrack’s Richard Donnell, the month just gone saw the first increase in the number of new homes up for sale and “A flood of potentially over-priced properties coming to the market would certainly put an end to the recent level of price rises.” Donnell said: “There are clear signs that the momentum in the London market is starting to slow and this is likely to continue in the run-up to the New Year.”
The truth is, while the tabloid papers like to tell us about the buoyant property market, and it is tempting to conclude there is no end in sight, there is more to the tale than all this hype.
First hint that the underlying fundamentals are not as strong as the property market analysts would have us believe lies within the Nationwide data comparing the cost of renting with buying. In little more than a footnote, Nationwide says that, if you include within the costs of servicing the mortgage, the cost of repaying the mortgage, than renting becomes the cheaper option.
And that brings us to the main factor which is often overlooked. In this era of lower inflation, the cost of repaying the mortgage is more significant than it used to be. We can no longer rely on triple digit inflation steadily eroding the true value of our debts, like it used to. And in that respect, the key advantage of buying a home over renting no longer forms the no-brainer the way it used to.
And then, if you look outside of London and the South East, things are nowhere near so good. As Hometrack’s Richard Donnell also said: “The reality for many home owners is that house price growth across large swathes of the country has been extremely modest over the last 12 months. “
While we fret about our future pensions, the Buy to Let investors see their property portfolio as their retirement nest egg. And it’s been a golden decade for these investors. But to compare the return with stock prices over the last decade is a little misleading. After all, markets did see their biggest crash since the 1920s during the middle of this period, and it took roughly the first half of this ten year period before house prices had recovered to the levels seen in the late ’80s.
The truth is that there are more certain things in life than a rise in the rate of interest next month – but not many. And an increasing body of opinion is now predicting at least one additional hike to follow. Will the market be able to withstand these shocks? The answer may lie with some Buy to Let investors who, faced with the probability that the next ten years is less likely to offer such remarkable returns, may turn to the stock market instead. Should the FTSE 100 follow the Dow and its little cousin, the FSTE 250, and pass its all time high, maybe stock market investing will be fashionable again, and that could be enough to tip the property market down, down and down.
© Investment & Business News 2013