Over the last year a number of readers have asked you about house prices but it appears that momentum is gathering for a slow up. Do you believe this is true?
Undoubtedly. It’s all about how we look at something. Back in 1990 I learned there was no such thing as house prices, just the price that houses or an average of had sold at in the past. The fact far fewer houses are selling and top end prices are still holding for the time being can easily maintain the average at a level that is perhaps misleading.
Thinking about what house prices are doing will not help you when trying to make a decision on whether or not to keep invested. It’s preferable to consider what the factors are that will drive the price. Those factors are not magical – supply and demand. Supply and demand are driven by sentiment and the greatest drivers to that are fear and greed.
The U.S. is an example and the current shake up in the stock market is testament to that. I spent nearly five weeks in five states in the U.S. this year, and it was obvious that the interest rate cycle (which has an 18 month head start on the UK) had bitten, and fear had now set in. Palm Springs, for example, is one of the destinations for the retired and wealthy from Los Angeles. House prices had collapsed and younger people who lived there, but couldn’t own a home, were pleased that prices were falling but weren’t taking the opportunity to buy. They believed they would fall further still and also were worried about higher interest rates so fear had set in. A stagnant market ensues where chains appear that never complete as they are only as good as the weakest link which normally collapses at completion.
Whilst the U.S. took a more deliberate and forward plan to slow house price inflation, the U.K. trotted along near 18 months later with their interest rate policy.
Let’s look at a number of factors that point to where we look to be going with U.K. house prices.
The office of national statistics has confirmed that over the last decade, house prices have risen by 204% whilst wages have only risen by 94%. (1) This points to a lack of affordability. Whilst in buoyant markets sentiment (the greed element) ignores what this will really mean, in a flat market, it can have a devastating effect on prices.
Repossessions are also an example. Currently repossessions are up 30% on last year and also at their highest level for seven years. (2) This is alarming. Although we have had a number of interest rate rises, for a large proportion of the market the rates have not really had any impact. Many borrowers are on fixed rates, so there have been no pressures on them with their payments.
When they eventually come out of their fixed rate the concerns will come home to roost.
This factor has a direct impact on supply, i.e. there are more houses for sale. Naturally when fear sets in of a falling market, this will curb demand and quite quickly you reach a point where you have a flat or falling market.
Other factors that are impacting now include U.K. banks’ keenness to achieve market share and the levels they are currently lending at. Because they are so aggressive, borrowers have been able to access money they shouldn’t really be able to in my opinion. This has created that final spin at the top of the market which could prove expensive. When they tighten their policy, borrowers will struggle to consolidate.
I noticed a number of houses that are selling well below what they are priced for sale. I also noticed a number of new build properties advertising free solicitor and legal fees, no valuation fees as well as cash back and a considerable discount on what the house was for sale at – another sign that demand has reduced and the crunch has begun.
If you have a query on house prices call 0800 0112825 to speak to an Independent Financial Adviser or e-mail info@wwfp.net
(1) BBC Website http://news.bbc.co.uk/1/hi/business/6549299.stm
(2) BBC Website http://news.bbc.co.uk/1/hi/business/6972967.stm
The value of shares and investments can go down as well as up
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