What’s the best possible thing that could happen to UK house prices? Your immediate answer will depend upon your own situation. If you have recently bought with a whopping great mortgage, you will want prices to rise. If you are planning to downsize, you will also want them to rise (you are interested in the cash left over after the move). If you have a good slug of equity and plan to trade up, you’ll want prices to fall. The percentage fall of the cheaper house you occupy will cost you less than you will save from the same percentage fall in the more expensive house you want.
Whereas if you want to trade up, but have very little equity, you’ll want house prices to rise (deposit, deposit, deposit). If you care more about your kids buying an affordable house now than leaving them an expensive one to inherit, you’ll also want prices to fall. And of course, if you are renting or “kidulting” with your parents in your childhood bedroom, you will most definitely want them to fall — right now and very fast. However, the best thing that could actually happen to house prices in the UK is… nothing at all.
If prices stick where they are for, say, five to seven years — or at least rise by 3% less than inflation — they would gradually revert to their historical averages. The young would gradually find property more affordable, particularly if the tight UK labour market causes wages to rise at the same time. Flat prices plus rising incomes equal more affordability (and hence less intergenerational inequality). So the young would be happier.
It would also be fine for those with mortgages, however large. Inflation would still be eroding the value of their debt over the long term. Watching house prices fall in nominal terms can be very traumatic for mortgage holders and those who judge their wealth by the value of their house. Seeing prices stall — even if you know they are falling a little relative to inflation — is a less troubling feeling.
Overall, the only group that would be much bothered by flat prices is the group we need worry about least — buy-to-let investors. Many rely on fast capital gains to boost returns as their rental yields are ripped to shreds by changes to tax relief, rising stamp duty and a renewed focus on tax evasion in the sector. A scenario of flat prices sounds pretty good to me. So much so that when we talk about flat prices it might be a nice idea to stop using the word that the property industry favours — stagnant — and use something less miserable instead. How about stable?
So what are our chances of having stable prices and all the fabulous social and economic gains that might go with them in the UK? Not quite as bad as usual. At the moment, all the main house price indices suggest that average prices are either growing very slowly (low single digits) or falling slightly — the latest from the Halifax suggest a 0.6% fall in December. Mortgage approval and transaction numbers are fairly flat. Surveyors are reporting slight falls in buyer demand, with London and the Southeast seeing the sharpest declines. And the number of months’ worth of unsold stock per surveyor has also risen slightly across the UK, meaning it is taking longer to sell each house. Add it all up, and even the UK’s endlessly bullish estate agents can’t quite bring themselves to claim that 2018 is going to be a bumper year.
Most are forecasting average price growth of 1% to 2% in the next 12 months. I’m loath ever to agree with an estate agent (more this week than ever, given the experience my sister has just had selling her house). But these are perfectly reasonable forecasts. Employment is high, wages will rise and the government’s maddeningly stupid Help to Buy scheme is still in place. But prices are already very high and mortgage rates are not going to fall any more (the average two-year fixed rate according to Moneyfacts is now 2.35%, up from 2.2% in October).
There will be regional variations. Prices will probably go up in the Midlands, home of reshoring and the UK’s manufacturing resurgence, but down in London, where properties are used as safety deposit boxes. So it makes sense that the overall price rise over the next few years should be about zero — at a time when inflation is running at about 3%. Perfect!
What could stop this from happening? First, interest rates. Inflation is returning all over the world — and while I have expected the interest rate cycle to be on the turn every year for the past few, it really is turning now, and this is something that could give us a nasty correction. If the cost of the money you need to borrow to buy a house goes up, the price you can pay for a house tends to fall. At the same time, from an investor’s point of view, if you can get a reasonable yield from something liquid and easy to trade such as a bond, then why bother with houses?
Second, politics. The current government has made it clear that it isn’t into particular types of property owner (buy-to-let investors and second-home owners in particular). But were a Labour government to take power, this would introduce a whole new dimension of risk in the form of very fast-rising interest rates and the potential for new property-related taxes. The Labour manifesto promised to explore the idea of a land value tax, and it’s probably safe to assume rising rates of capital gains tax too. An election followed by a Jeremy Corbyn victory would, I suspect, make pretty much everyone yearn for “stagnant” house prices. Anyone wanting the UK property market’s rebalancing to be gentle should maybe hope there isn’t one.
One final point on property. Given the likelihood that prices will at best be stable in the UK, now is not the time to invest heavily in it. The same is probably true everywhere — the interest rate turn is global. But you might make a note to do so once things have settled. Halkin Research pointed me to a report just out from the San Francisco Fed which looks at returns from all asset classes back to 1870. Its conclusion? The long-term average real returns on global housing and global equities have been much the same — the difference being that housing has made its returns with less volatility. Assuming Britain’s new fashion for socialism doesn’t spread around the world, all portfolios should, it seems, one day have a global residential property fund in them.
• This article was first published in the Financial Times.