The bubble may have burst, says Ross Clark, but a crash looks unlikely. For now, property remains a sensible investment — better than sticking cash in a low-interest account
I’m getting fed up with my 2.5 per cent Northern Rock Super-Sucker’s Account. It was OK when it was paying 6 per cent and Alistair Darling was promising by the hairs on his chinny-chin-chin to repay every penny in the event of the bank going belly-up. But I can’t see the point now: why risk your capital for some measly little apology for interest which isn’t even keeping up with inflation? I keep wanting to hook out the money and put it into something solid: gold or property.
I know I am not the only one who feels this way: that is why property prices unexpectedly started rising in the spring of 2009, a time when they were almost universally expected to keep on plunging. Almost everyone in the property business to whom you talk speaks of gnarled old tight-fists raiding their piggy banks to put their hoarded savings into a buy-to-let or a place for their kids.
The trouble is there are only so many cash savings to be mined, and they seem close to exhaustion. There is suddenly too much property on the market to sustain the pretence of a lively property market. The main house price indices — the Halifax and Nationwide — have for several months now started to register declines in prices. The monthly figures, which cause great excitement on front pages — are pretty meaningless swings with the margin of error. But after three months of falls you can be pretty sure: yes, prices are falling.
It isn’t cash-buyers who ultimately drive the property market, but the mortgaged masses. And they are still starved of credit. You can’t go from a situation in which banks were happy to lend buyers a mortgage worth five times their salaries and for 100 per cent of the value of a property to one where they are loathe to exceed three times salary and 75 per cent and not expect it to have a massive impact on property sales and prices.
The continuing constraint on mortgages for homebuyers is one reason why I remain convinced that we face a second correction in real property prices. The other reason is that buying property for investment doesn’t make a huge amount of sense at the moment. Rental yields remain too low. I’ve scoured the country for properties which promise me a better return on my money than my Super-Sucker’s account, but I can’t say I have had too much luck. At a push it is possible to find a property which seems to offer a gross return of 5 per cent. But once you have taken off the letting fees, the management fees — or the value of your own time for doing the job yourself — the loss of rent during ‘void’ periods when you have no tenant, the maintenance costs, the insurance costs etc — you will be lucky to have a net return of 3 per cent. During the mid-1990s — which turned out to be a genuinely good time to buy — net yields were twice this.
And yet still I don’t believe that investing in property is necessarily a disastrous thing to do at the moment. A fall in real property prices, yes, but a crash in actual prices? I wouldn’t bet on it. The next phase of the property correction may well resemble the great hidden crash of 1974, when stagnant prices disguised a 17 per cent fall in real terms. Why? Because I suspect that the coalition, for all its assurance to the contrary, will ultimately do just as Labour did: try every trick to generate inflation rather than suffer millions more being plunged into negative equity. It will amount to a disgraceful theft from savers in order to give to borrowers. But the indebted have an awful lot of votes and can be relied upon to exert vast lobbying pressure upon the government and Bank of England for early release from their debts. Savers, by contrast, can be relied upon just to grumble a bit, and probably vote Conservative anyway.
There is another reason to suspect that prices will not crash in actual terms. House prices only ever fall when there are large numbers of forced sellers. Today, there are remarkably few. Repossessions are running at under 40,000 a year — roughly half the number predicted by the Council of Mortgage Lenders early last year. By the way, these are not all people ‘losing their homes’, as the headlines often mistakenly claim: a lot of repossessions are buy-to-let investments that went wrong.
Homeowners are emotionally very different from stock market investors. Look up and down your own neighbourhood: I bet that for every property which has sold you can count one or two more which have been on the market for a year or more, whose owners are blaming the government, their estate agent, the philistine English public for failing to appreciate the quality of their home improvements — anything other than their own failure to cut the price. Once the idea of an inflated figure becomes fixed in the mind of a British homeowner there is virtually no shifting it.
That is what makes me think we are more likely to be in for a prolonged period of low turnover and stagnant prices in the property market rather than a plunge. How long the period of stagnation will last depends on how long it takes inflation to bring real property prices down. Of course, owning property in such circumstances will not be comfortable, but it is certainly no worse than holding cash deposits at rock bottom interest rates — at least you should be able to look forward to rising rents.
And there is always the chance that you will be there, in property, on the day when the market really does reach bottom and the next inevitable property boom begins. The cry ‘It’ll be different this time’ is no more true now than it was at the height of the boom. There is zero chance that banks, homebuyers and government ministers will have learned anything from the debacle of the last boom. When the market eventually starts rising, once again there will be thousands jumping on the unique get-rich-quick opportunity offered by gearing in a rising property market. Will interest rates be raised fast and quickly enough to stifle the next unsustainable boom? Not a hope. Month after month the Monetary Policy Committee will study the figures and pronounce that recovery is not yet well enough established to permit rates to rise. And of course recovery never will be established — until we are back in the middle of a property bubble.
The British property market has been a story of boom and bust for at least two centuries. Just try to name a single reform since 2007 which is going to stop it now. I am in no hurry, but the more I look at my mouldering pile of cash the closer I get to thinking at some stage it will have to be transferred into some property.
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