When it comes to investing, there are numerous questions that need to be asked, and lots of things which need to be properly understood before committing your hard-earned money
UK house prices: Slow and steady wins the race
It is often remarked on the continent that Brits are especially obsessed with home ownership, and that in Europe it is perfectly normal and acceptable for someone to rent an abode for the duration of their lifetime. Yet there is a certain irony when this dogma is stacked up against the figures. In short, Britain’s home ownership rate of roughly 63 per cent is the fourth-lowest in Europe, and lags some way behind Romania, which leads the way on a staggering 96.5 per cent.
What is striking is the list of countries below the UK on the list: Germany, Austria and Denmark. Fifth from bottom is France. At the top of the list are the likes of Croatia, Lithuania and Slovakia. The clear takeaway is that home ownership levels and wealth are, at best, uncorrelated. In fact, at a simplistic level, a case could be made that, across Europe, they are inversely correlated to some extent.
Either way, in the UK, unaffordable housing has become a cause of social unrest, particularly from an inter-generational perspective, with a marked disparity in home ownership between young and old. So much so that popular opinion among the so-called ‘Generation Rent’ is that a house price crash would actually be welcomed.
Such a prospect has been widely mooted in the wake of Brexit uncertainty too, with some believing it to be inevitable, especially given recent house price data. But, even for those who feel the housing ladder is out of reach, would such a circumstance be a force for good?
Perhaps the best point of reference is that of the early 1990s, when house prices plummeted by 20 per cent in the space of four years. The damage was severe. Many of those with mortgages were no longer able to afford repayments. Around 250,000 homes were repossessed during that period. And the spectre of negative equity haunted many a homeowner, leaving them unable to sell a home they were already losing value on.
More significantly, there is no evidence in such an instance that benefits would be redistributed to renters and/or prospective first-time buyers. Banks would be put under strain, and no doubt tighten lending rules for mortgages. Households would also likely have to reduce household spending, which would have implications for economic growth, and, by association, overall incomes. And there is nothing to suggest rent would decrease either. In fact, when Dublin endured a 50 per cent dip in house prices, city rents remained extortionate.
So yes, those insulated from the knock-on effects of a house price crash, and whose incomes are left unaffected (and with the capital in place to take advantage) could then pounce on lower house prices. But it is likely that this pool of candidates would be a lot smaller than the popular school of thought suggests.
So, could it happen?
The reality is that a dramatic drop-off in house prices is not anticipated by most experts, despite indications of widespread cooling. With employment at record highs, 350-year low interest rates, and an acute housing shortage, the property market won’t see its bubble burst anytime soon.
Perhaps a more probable – and welcome – eventuality is a slow, sustained correction of prices, exactly as we have begun to observe. Government policies to encourage first-time buyers in recent times - underpinned by schemes like Help-to-Buy - have had the consequence of fuelling house price growth. However, increases to stamp duty and taxes on Buy-to Let have played a role in reversing the trend – or at least taking the steam out of it. Concerted, robust efforts to increase levels of housebuilding would be a major boost to the cause too.
For homeowners, the idea of stagnating house prices will not be an appealing one. However, with home ownership levels breaching 30-year lows, average house prices at around 7.6 times annual salaries, and profound age inequalities continuing to rise in this respect, perhaps this recent direction of travel is the happiest of mediums – one that is gentle enough to avoid triggering an economic shock, but significant enough to make the home ownership dream a more realistic one for today’s youth.
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