A few years ago almost no one thought it was possible for British house prices to fall. Last year, 16% thought they might. Now, according to Findaproperty.com, that number has risen to 42%. A mere 11% now expect prices to rise from here.
You might wonder how the latter group could think this, given the lack of mortgage finance, high unemployment and falling real incomes. But the last few weeks have given them some supporting arguments. The first comes from the Halifax, whose research says it is now cheaper to buy a house than to rent one (£608 a month versus £706 for a three-bedroom house). The second comes in the form of a new wave of buy-to-let mortgages and suggestions that those who buy smartly can get yields of 6%-7% on investment properties.
But these are red herrings. The Halifax index is pretty comprehensive. It takes into account that owning a house isn’t just about mortgage payments. So it includes calculations that reflect the lost interest on the cash you use to pay your deposit, maintenance costs, insurance and so on. But what it can’t do is factor in the potential for change in the main thing that is making buying look cheaper than renting for now – low interest rates.
In normal times the base rate (set by the Bank of England) is 2%-3% above inflation. With inflation now over 4%, that would make the rate 6%-7%. Mortgage rates are usually a few percent higher still, so think 9%-10%. Yet today, due to the extreme low-rate policy the Bank is being forced to pursue to deal with the financial crisis, the base rate is 0.5%; the average mortgage rate for new borrowers is 3.6%; and, says the Financial Services Authority, around 6.5 million households are paying variable rates at an average of 2.8%. The cost of the average monthly payment has fallen by 40% in the last two years alone. When that changes – and it will – buying will look a lot more expensive than renting again.
Next the yield business. Moves in rates make a huge difference here too. Moreover, the idea that a 6%-7% yield marks a floor in the market is nonsense. I have to hand a copy of Country Life from 1998. A flick through shows that while house prices back then were a quarter of today’s, rents weren’t much different. On a small-ish country pile, the yield looks to have been 15% or so. Council of Mortgage Lenders data suggests the average gross yield was 9.5%. That may not sound much above current levels, but it is. Today, annual consumer price inflation (CPI) is 4.0%. So the real gross yield on residential property is at best 3%. Then CPI was 1.6%, so the real gross yield was over 8%. That’s what a real bottom-of-the-market yield looks like. We’ve a way to go.
PS: Just another reminder – we’re holding the first MoneyWeek conference on Friday 17 June, at Number One Whitehall in London. We’ll have the full registration details soon.