Question Posed If UK House Prices Will Ever Rise Again?

Rising UK house prices have been a fact of life for around three decades now. Sure, there’s been the odd blip or ‘correction’ to use the more technical term but the wider trend has unarguably been one of upwards growth. That reality has been both embraced by those who have made money through investment properties and decried by others who believe that owning a property is a ‘right’ anyone earning a steady salary and maintaining reasonable money management should have access to. A right denied to many would-be first time buyers within the current context of property prices. There is a third argument that property prices pushed tightly to the upper limit of affordability, many would now say beyond, has a negative impact on the wider UK economy, tying up too much capital in illiquid bricks and mortar.

With UK property prices seemingly already at or beyond the ‘affordability threshold’ in many parts of the country – London and the South East the most extreme examples – a recent Financial Times piece asks the legitimate question of whether we haven’t now reached ‘peak property prices’. Will UK property prices ever rise again in real terms? That’s clearly an important question, particularly for anyone with or considering investment properties. Arguably even more so than for those buying property as a primary residence. If we have reached peak property prices in the UK it doesn’t mean investment properties will be dead as an asset class. Property is, after all, an income earning asset. But it does mean an adjustment to investor thinking, approach and the business model that has been so easily profitable for a long time now.

The report looks at a longer term analysis of the UK property market, stretching back to the 13^th century. The analysis in question, the Deutsche Bank Long Term Asset Return Study, shows that while UK property prices have indeed risen by an average adjusted 3% per year since 1939, significantly accelerating over the past couple of decades, the same was not the case before then. In fact, while property prices have risen 834% over 58 years, the actually fell by around 50% over the course of the 7 centuries before that. While this of course is within the context of very different socio-economic conditions, the point illustrated is that investors should be wary of presuming that the financial future will be the same of the financial past.

The question posed by the Financial Times is what changed towards the middle of the previous century that resulted in several decades of consistently rising house prices and whether there is isn’t a chance those conditions won’t change again.

The UK’s population increased significantly after the discovery of a cheap, effective vaccine again smallpox, at the time the country’s biggest killer, at the end of the 18^th century. That was the beginning of improvements in health and life expectancy around the world that has gradually gathered pace. From 1820 to the year 2000, the average annual increase in the global population was 0.98% per annum. But that accelerated hugely from 1950 on. The world’s population more doubled over the half century to Y2K, surpassing 6 billion.

Post War Baby Boomer Generation The Catalyst For Current UK Housing Market Conditions

Analysts and researchers such as Paul Hodges, chairman of London strategy consultant IeC argue that the conditions that met the post-war ‘Baby Boomer’ generation mean that a big rise in property prices over the years since was only to be expected. Inflation and unemployment levels rose across the G7 region in the 1970s as post war Baby Boomers reached employment age and began to compete for jobs. That competition helped spur the economy which eventually led to a level of equilibrium. By the 1980s the same generation were entering their 30s and 40s and beginning to plan for the future. The result? A stock market boom as a new wave of investment capital flowed in as pension provisions were built.

The comparative affluence created by the stability of the post-war period also meant the Baby Boomers were quick to build their own families, further growing the size of the next generation – a second without significant numbers killed off by war or epidemics. They also aspired to bigger and better homes than their parents had lived in and their political sway led to a tax and regulatory system designed to woo their votes. So tax relief on mortgage payments and the exemption of capital gains tax on the sale of primary residences became enshrined in British law.

Source: EconomicsHelp.org/Nationwide

Property was in low supply in 1970s Britain, especially the kind of property more affluent Baby Boomers wanted to live in and prices naturally began to rise steadily year-on-year. This, in turn, convinced pension investors that investment properties were a solid asset class. With the fiat money system also coming into existence in 1971, when the final apron strings to the gold standard were cut, money supply was also able to burgeon along with the population and helped facilitate the creation of a growing middle class able to add to the property they actually lived in themselves. Until then, rent generating property and land ownership had been the exclusive preserve of the aristocracy and upper classes.

A further consequence of the new fiat money system was central banks taking control of base interest rates. At the point the property market suffered a major correction during the international financial crisis a decade ago, the reality an affordability ceiling had been reached was already taking shape. However, in their attempts to stimulate a recovery, interest rates were slashed across the globe with the UK no exception. From the 1990s onwards rates had already dropped much lower than they had been in the 1970s and 1980s, helping to keep property prices moving steadily upwards.

The most recent move to take base interest rates to almost zero has meant that while property prices over the last ten years have moved beyond where they were pre-crisis, particularly in areas such as London and the South East of England, the cost of holding a mortgage has barely moved for several years.

Has The UK Housing Market Now Run Out of Catalysts That Can Keep Prices Moving Up?

The interest rates available on UK mortgage products have never been lower. So the question has to now be is there anything left in the tank that would allow prices to continue on the trajectory they have followed since the 1970s? Some believe that the global population will double again over the next couple of decades. Would that not place increased pressure on housing supplies, pushing up prices further even if financially painful for everyone that doesn’t already own their own home?

But the UK’s population growth peaked a long time ago now – in the late 1960s when the Baby Boomers were starting their own families. Then it was a little over 2%. It’s since dropped back to the 1% level. A UK population again growing as quickly as it did a few decades ago relies on several assumptions, the core of which is the sustained attractiveness to immigrants of a UK where they are unlikely to be able to afford their own home as well as an immigration policy that would allow them in even if this were to remain the case. Add in interest rates again gradually inching back up and changes to legislation making the ownership of multiple properties less of a cut and dried investment case than it has been for decades. The pendulum of political influence has swung in the direction of those struggling to be able to afford their own home.

The most recent UK budget released in autumn 2018 was one in which an ‘end to austerity’ was announced and a pledge to increase government spending. But at the same time capital gains tax exemption for investment properties that had previously been the owner’s primary residence was cut and an additional 1% stamp duty surcharge levied on non-UK residents buying UK properties.

Has The Change To The UK Property Market Already Begun?

Some analysts believe that the era for property price growth has already ended with the period since 2000 its last gasps – a kind of drawn out version of the ‘melt up’ that typically happens at the tail end of an equities bull market before the cycle turns.

The change may not be immediately apparent. There is a high chance of a ‘post-Brexit bounce’ as markets breath out with relief and consumers gain confidence. Many also expect rising inflation over the next few years - something that the current trend of rising salaries is paving the way for. That could also mean housing market volatility for a few years and a delay in a new downward or price stagnation trend becoming obvious. But prime London prices have already tumbled 25%-30% in recent years and countrywide price increases are on average slightly trailing inflation. This could indicate a longer term downward trend towards long term means has begun. 10 or 20 years from now it could become clear that the last few decades have been an historic anomaly and bricks and mortar are not the nailed on investment safe bet they are generally commonly accepted as.

Does Price Stagnation Mean that Investment Properties Will No Longer Add Up As An Asset Class?

Investment properties no longer being a ‘thing’ and second homes again reverting to a luxury of the rich rather than affluent middle class or financially savvy socio-economic climber is also a big assumption to make. It is likely that investment properties will cease to be an easy meal ticket with rental returns almost a bonus to huge capital gains. The business model may well change but that doesn’t mean property will no longer make sense as an investment.

The market is likely to evolve. If owners of investment properties can still make 3% to 7% annual ROI on rental income property will still be a strong investment. Investors put money into fixed income investments such as bonds for a lot less. The reality is there is a degree of security in bricks and mortar, even if it ceases to be the kind of stellar investment class it has been over recent history.

Property investors will probably have to have greater cash reserves and use lower leverage to make it work. The entry threshold for acquiring investment properties may well rise over the next decade or two. But even if all of the arguments listed above as to why the era of property price rises may finally be over turn out to hold true, it is unlikely to mean property will no longer be an asset class investors are interested it. That conclusion also means stacking assumptions in a precarious manner. Property investment almost certainly won’t disappear but as an asset class its character will likely change and investors should prepare themselves to adapt.