What asset class are investors in the UK most positive about?
It’s got to be shares, hasn’t it? After all the FTSE 100 has not only made record highs, but broken through the magic 7,000 barrier.
Well, if you did guess that, you’d be wrong. It’s good old bricks and mortar of course!
The British obsession with property remains unbowed. But if there’s any truth to the idea that you should sell when sentiment is at extremes, then now looks a poor time to invest in UK housing.
Everybody loves property
UK shares are popular right now. A recent survey from Lloyds suggests that there’s a 33-percentage point gap between those who are positive about the class and those who are negative.
However, investors are even more bullish on property. There’s a whopping 43% gap between the bears and the bulls on this one.
You can see why. In the first nine months of last year, house prices surged. In London, they went up by between 12% and 20%, depending on what measure you use.
But in the past few months, the market has cooled. According to the Land Registry, London prices are now lower than they were back in August. So anyone expecting massive gains from here – as many still do – could end up being very disappointed. In fact, prices in London could fall a lot further.
Few asset classes have the level of official support that UK residential property does. The government is trying anything it can to keep the bubble inflated. The Bank of England has been happy to sit on the sidelines, while paying lip service to the idea of affordability.
The only institution to try to do anything practical to rein in prices is the Financial Conduct Authority (FCA) – partly because it’ll get the blame if there’s ever a repeat of 2008.
Just under a year ago, the regulator tightened up rules on lending. Banks were forced to take a detailed look at whether a borrower could afford a loan, rather than just ticking a few boxes.
The implicit aim was to cool the market by reducing the amount of lending. And it does seem to have had an effect.
The latest figures from the Bank of England show that actual mortgage approvals for house purchases are at their lowest level in three years. Even the seasonally-adjusted figures are nearly 25% down on a year ago. Surveys suggest this will continue – the number of loans in the pipeline is also falling.
So why haven’t prices fallen harder? It’s mainly down to lack of supply. I talk from experience. For the last 18 months, I’ve been looking at property websites almost daily. That search only ended this month, when I finally completed on my purchase of a flat. During that time, very little has appeared in my area, apart from a brief surge during the height of the boom last spring.
Sellers probably haven’t come to terms with the fact that the market has shifted. They’d rather sit on their properties, in the hope that the boom will resume. But this can’t carry on indefinitely – many sellers are themselves buying a house. So my guess is that in the next few months, we’ll see sellers return to the market. This should help prices move downwards to more reasonable levels.
‘Super-prime property’ could be the canary in the coalmine
One big feature of this boom has been the way it started with a big surge in super-prime property, in areas such as Chelsea, Kensington and Westminster. This then radiated out, as people priced out of those areas moved to slightly less expensive ones. In turn, they displaced others.
As a result, notes The Daily Telegraph, Clapham, Chiswick, and even Kilburn, are the “new Chelsea”. However, this process now seems to be going into reverse, with prices in super-expensive areas falling.
According to LSL Property Services, prices in Kensington & Chelsea have fallen by 7.2% over the past year (and could fall even more if a mansion tax is introduced after the election). This should also feed through into more reasonable prices for the rest of the market.
So overall, it looks like prices could fall further. We could see falls that wipe out the last 18 months’ worth of gains – and more.
It’s worth noting that this particular boom has very much been a London-centred phenomenon. So if you’re based in or near the capital, and you’re thinking of downsizing, retiring, or moving to the country for a better quality of life, now might be a good time to consider it – my colleague Merryn Somerset Webb suggested as much a few months ago.
Oh, and if you are interested in investing against the crowd, you might want to consider shares in the eurozone. The Lloyds survey I mentioned above had them as the least-loved asset class of all (on a score of -33%, versus +43% for UK property). This suggests investors are still too pessimistic, especially given that the European Central Bank is printing money.
By the way, if you haven’t yet viewed Tim Price’s special offer – my colleague John mentioned it yesterday – do it quickly. Yesterday morning he had just under 60 of these packages left to send out – now he’s down to 22 and falling. Check it out now!
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