By Michael Baxter 1 Oct 2010 [0 Comments | 1,795 views]
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Two pieces of news have developed over the last few days which may collectively point to a surge of new properties coming on the market, while demand crashes. It may be that only one animal can stop a resulting crash in house prices.
Item number one: A report out from self-styled retirement specialist LV says that approximately 1.2 million future retirees may cash in their property to help fund retirement.
LV calls these people HIPpies (‘Home is Pension’), an appropriate description when you consider this is the very generation that flirted with flower power in the late 1960s and early 1970s.
Of course, most of these hippies are not planning to sell their home, but rather will look to top up their mortgage. We may well see a rise in equity release schemes. But LV may well have underestimated the resistance that some have to equity release, and one assumes others will sell their homes and downsize instead.
If you are a regular reader here, you may recall that back in 2008 we published an article suggesting that there was a lot more housing stock in the UK than is commonly realised. It seems that around 6.8 million homes in the UK are bigger than their occupiers require, meaning they have more than one spare bedroom. It was suggested that the owners of these homes lived in properties that were bigger than they required simply because they saw their home as an investment. So, one assumes that if you are approaching retirement, if your pension is inadequate and your home is bigger than you need, the most logical course of action is to downsize. See: Housing under-supply myth: house price crash may bring families closer together
It seems to us that an inevitable consequence of the retirement of the baby boomers will be that there will be more properties coming on the market.
What we are seeing develop here can be traced back to the dotcom crash. Back in 2000 shares crashed, interest rates were slashed, and investors fled from equities and into property. But the appalling performance of shares since has meant that pension provisions are totally inadequate. For many baby boomers, the equity sitting in their home provides the only hope of a decent retirement, and so we are set to see a rush of properties coming on the market. House prices can only go one way, and the property bubble that developed as the equity bubble burst in 2000 will go the same way.
Item number two: Yesterday saw a report from the Bank of England which suggested lending criteria for mortgages are set to get even tougher. The credit conditions survey from the bank said that fears over impending public sector job losses are going to make banks even more cautious with their lending.
And so the trend we have seen recently of falling demand while supply picks up seems likely to become even more exaggerated over the next few years.
Two animals may stand in the way of a full blown crash in house prices. Firstly, there’s your buy-to-let investor.
Yesterday, buy-to-let mortgage specialist Paragon revealed plans to return to new lending. Paragon, which was about as bullish as you can get on the housing market right up the point when recession bit in the UK, has argued that as first-time-buyers struggle to raise finance, buy-to-let landlords will move in, snap up properties and rent them out. Then again, it would take a very brave landlord indeed to start buying up properties right now.
But there is another animal that may yet save the day for property, and it belongs to the very same species referred to above, the HIPpies.
The best ever to time to buy a property in the UK was probably around 1967. Back then UK inflation was set to take off, and real interest rates, that’s the rate of interest minus inflation, were set to go negative. By 1975 inflation was around 25 per cent, and interest rates were half that level. Anyone who bought a property in 1967, and then saw their wages go up with inflation, were laughing all the way to the bank. Assume someone who took out a mortgage in 1967, and for the sake of argument made mortgage payments worth 50 per cent of net income; we calculate that, providing this person’s wages went up with the growth in GDP per capita, then within 15 years their mortgage payments would have cost a mere 8 per cent of income.
1967 is also known as the summer of love, but that may also have been the point when the baby boomer generation fell in love with property investment.
Returning to the LV survey. It said that: “[54 per cent] of over-50s who are still in work would advise their children to invest in property for their retirement too, just greater than the number that would recommend their children pay into a pension (53 per cent).”
So you can see, the baby boomer, or is that the hippie generation, fell in love with property and the love affair is not over. Furthermore, this love is the only thing standing in the way of a full blown crash.
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