Thursday, 10 January 2013

House prices update

I last wrote about the housing market 18 months ago and in 2013 things look quite similar to how they did back in 2011. In fact, the past three years have all had stable house prices and consistently low transaction volumes. Now it's time to see how my predictions worked out and make some new ones.
House prices (£) and number of transactions (Land Registry data)

Predictions from 2011

I think prices will fall over the next year, maybe a few percent. However with inflation running towards 5%, real house prices are going to take a hit even if nothing happens.
Over the subsequent year house prices fell about 0.5% and inflation was 3.7% (RPI). My prediction was too gloomy, with house prices holding up better and inflation falling somewhat. However, overall it got the main gist: little movement & prices outstripped by inflation, so I think that's a reasonable effort!

Where are we now

More recently there has been a small rebound, however inflation continues to run ahead of prices.

The house price to earnings ratio is currently around 5.1, against a historical average closer to 4.2 (according to Nationwide). However with historically low interest rates this does not seem likely to be an important factor in the short term.

To me it seems that there is less obsession with house prices & making a fast buck. There is evidence that buyers are making sensible compromises on location to find more affordable accommodation - cheaper places near jobs seeing strong sales.


For the foreseeable future I expect the unwinding of the 2007 bubble to continue in a similar way:

  • Inflation rising faster than house prices & continuing to erode savings.
  • No significant changes to the supply of homes to buy or rent.
  • Low rates on mortgages.
I'm feeling optimistic on house prices so I'm guessing house price rises of 1% supported by cheap lending over the next year. However betting on the uncharacteristic consistency of the housing market would probably be foolish!

Time to buy a house?

My previous post was about the buying a house in London, so obviously I don't think it's a bad idea. However the reason for this is not house prices, it's about inflation.

The housing market is unpredictable and although London defies gravity year after year, there are significant affordability & lending issues. The big positives right now are the extremely low interest rates on long term fixed rate mortgages, some barely above inflation. My guess is over the next 5 years:
  • House prices will decline in real terms, but this will be mitigated by inflation eating away at mortgages, helping to protect the equity built up.
  • Savings will gradually lose value to inflation due to the policies of the Bank of England.

So although I don't think there's a fast buck to be made, if you can find somewhere affordable & nice, which you're happy to live with for 5-10 years, now seems like a reasonable time to buy. This is doubly so for people with significant savings who can access low rate mortgages fixed for 5 years.  

Unfortunately for those shelling out on rent, escaping the rental trap is still a case of needing money to save money. 
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