Every survey of the property market spawns more doomy media headlines like this one. There’s now competition among economists over who can predict the biggest slump (so far it’s 50%). It’s time to adopt the Rip van Winkle strategy.
Rip van Winkle, in a story by Washington Irving published in 1819, fell asleep after joining in a game with fairy folk and woke up 20 years later*. Do that with your property and you’re sure to wake up richer than when you fell asleep. Keep reading those doomy headlines and you may die of worry.
As a result of the credit crunch, the number of property transactions is down 40%. The smaller the number of transactions, the less reliance you can place on price data. Prices seem to be falling. But they are falling like a feather rather than a brick.
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Employment is the key
Economists who are predicting a slump are also implicitly assuming a severe recession. It is only when people lose their jobs that they abandon their homes and post the keys to the mortgage lender – which was what happened in 1991. History never repeats itself, but as Mark Twain noted, it does rhyme. This time will be the same but also different.
Stamp Duty at the higher rates introduced bv Gordon Brown is now a severe dampener on property moves. And affordability issues will price first time buyers out of the market for some time to come.
So, despite government rhetoric about encouraging home ownership, we are heading for a 1930s-style housing market in which people who want to move every few years are better off renting. In the 1920s, 80% of people rented; by 1980, renters were down to 10%, but are now almost 15%. The percentage of renters is almost sure to go on rising over the next decade.
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Why BTL will keep on growing
The Association of Residential Landlords and Agents (ARLA) has published some interesting data on the buy-to-let market by Professor Michael Ball. He reckons the 3 million BTL properties in the UK are worth about £500 billion, of which only £126 billion is financed by loans. And he expects BTL to go on growing steadily, by about 3% a year, as a proportion of the UK housing market. Here’s his main reason:
“Whether there will be enough housing for the hundreds of thousands of extra households expected to exist over the next forty years is a common question. The answer to it is a resounding no, unless there are unlikely, dramatic increases in housing supply. Instead, prices will have to rise sharply to dampen demand in order to make it fit the housing stock that exists.
As part of that process of trimming demand, rising prices will choke off household formation as well. High housing costs force many to live with others when they would rather not; in dwellings they are not happy with either.”
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Planning holds up new building
That is not an ideal scenario, but unless we change the planning system to make it easier to build, that’s what will happen. With every single one of the 15 proposed new eco-towns under fire from the Council for Protection of Rural England (aka NIMBY), the local newt-fanciers, uncle tom cobbley and all, the chances of a major expansion in new-build are vanishingly small.
And our dysfunctional housing market has responded to the credit crunch with a likely build of 100,000 new units this year instead of the 250,000 to 300,000 that are needed to meet the potential demand.
There’s the key: potential demand. Potential demand becomes effective demand only when it’s got a cheque book, and that depends on the mortgage lenders. There isn’t a mortgage famine - everyone who needs to remortgage is, it seems, finding a willing lender – but it’s much harder to trade up, and very hard to buy your first home.
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Buy to let will support the housing market
Those constraints don’t apply to the BTL market, where 80% Loan-To-Value ratios remain the lending norm and rising rents (projected to go up by at least 10% this year and next) mean landlords can now look forward to rising rents and probably to falling interest payments from next year.
Hence ARLA’s prediction that BTL investors will underpin the housing market. I partly agree with that, but what we need is more speculators to start buying for cash in the hope of making a good profit when the market turns. That’s not yet happening and I think it will be winter before it does. And yields on BTL need to be higher for it to look like a slam-dunk moneymaker.
So you can expect the doomy gloomy headlines to run for several more months. Just pull the blanket over your head and go to sleep.
* The humorous point of the story was that in the meantime his wife had died and his kids had grown up, enabling Rip to adopt a happy-go-lucky fun-loving lifestyle that was the envy of his married friends.
