I’m having an interesting week. I spent Tuesday flying around Scotland and Northumberland in a helicopter looking at forests and windfarms (more on this next week), and now I am hanging around at the National Association of Pension Funds conference in Edinburgh.
The first was obviously exciting, but the second is more interesting than it sounds. Yesterday, the big speaker was Blackrock’s Larry Fink (he’s “open” on Scottish independence and thinks private pension saving should be compulsory). And today it was Roger Bootle of Capital Economics, a commentator with whom we have a good amount of thinking in common.
I had a quick chat with Roger after his talk. I thought you might be interested in his view on house prices. We agreed that while there has clearly been a proper house price crash in much of the UK (the north, the southwest and so on), the average house-price-to-earnings ratio – at well over six times – is still ridiculously high relative to historical norms.
We agreed that while there are some structural reasons why the ratio might settle at a higher rate than in the past (dual income households being the main one), that absolutely doesn’t explain all of it.
If you accept that, you then have to agree with one of two things. Either the historical relationship has entirely and permanently broken down and is of “no value”, or the “market is heading for a nasty adjustment”. I think we all know which one of these Bootle agrees with. The question is simply when this might happen? The answer is not yet.
That’s because with interest rates at their current all time lows (five years this week), mortgage payments as a percentage of take-home pay are just below their long-term average. At this level of interest rates, houses are affrordable.
The government has “thrown everything but the kitchen sink” at this market in their desperate attempt to revive it, says Bootle. They are being and “will be successful”. If you own houses or are buying houses, you have nothing to worry about for the “next few years”.
However, all good things must come to an end and there is “marked trouble ahead”. Right now, interest rates are at their lowest for 300 years. Yet mortgage payments as a percentage of take-home pay are only just below their long-term average. That means that the minute rates begin to rise (Bootle is forecasting late 2015 for this), they will rise above that average: “there is marked trouble ahead”.
However, the fact that rising rates will lead to a housing crash, which will in turn have “dire consequences” for everyone from the banks down, is hardly a secret among government officials and economists.
So, Bootle – like us – doesn’t expect it to happen quite like that. Instead, he sees interest rates rising very slowly and peaking out at 3% rather than 5-6% (at which point mortgage payments would be well over 50% of take-home pay).
That would mean high inflation and a falling pound. But it would also mean that anyone holding property would be unlikely to lose money in nominal terms. They’ll definitely lose in real (inflation-adjusted) terms. But that never feels quite so bad.
• If Bootle was choosing one place to put his own money today, he would, he tells me, choose UK equities. They aren’t expensive and – rather unexpectedly – he has high hopes for our future growth.