The Daily Telegraph: Homefront
Sat 04 May 2013
Our award-winning writer on how to make the most of your biggest asset. This week: price trends.
Property continues to confound the pessimists with house prices rising despite the dismal economic backdrop, according to offical figures from the Land Registry this week. Years after wiseacres began to claim that bricks and mortar amounted to a bubble that must burst, there is is little if any evidence of their predicitions coming true. While wages are frozen or falling and the FTSE 100 index of Britain's biggest shares trades lower than it did at the end of the last century, house prices edge even higher.
The Land Registry reports that the national average house price increased by 0.9pc over the last year to 162,000. Meanwhile, buyers in the capital today must pay 2.5pc more than last month - or 9.6pc more than they would have done a year ago- with the average price in London just below 375,000. Anyone who believed the doom-mongers and preferred to rent rather than buy must bitterly regret doing so now. However to be fair to those seething for a setback at housepricecrash.co.uk and elsewhere, some of the factors that boosted London valuations were unexpected and unlikely to be repeated.
First, the Bank of England's decision to freeze interest rates at a historic low four years ago tended to depress sterling's exchange rate. So did quantitative easing, a practice often likened to printing money. Both factors made British history cheaper for foreign buyers. Then gGeek and now Cypriot euro crises boosted international demand for a safe haven. The cosmopolitan nature of the capital made it a magnet for these inflows. But when I predicted three years ago that an influx of foreign buyers would help to propel prices in the capital even higher than they were then, it would be fair to say there was a widespread scepticism. Here's whatI said in this column in 2010: "One explanation is the international popularity of Britain's capital city, not just as a pleasant place to live, but also as a relatively secure location to park large amount of wealth.
"Now the most desirable parts of London, are turning into Manhattan-On-Thames; undergoing a step change in valuation which will mean future generations of ordinary Londoners must rent or become long-distance commuters." Sadly for many younger people that has already come true. However, devaluation cannot be repeated indefintely. While foreign buyers are likely to have less impact on the London property prices in future the Chancellor has moved decisively to underpin house prices nationally.
Even estate agents expressed concern about the effect of this extra stimulus to a market that many complain is already too expensive. Simon Rubinsohn, chief economist at the Royal Institute of Chartered said: " The government need to be careful this doesn't create another bubble, pushing prices up at the expense of buyers." Easier credit has already helped boost demand and prices. Peter Rollings, chief executive of Marsh & Parsons, explained: " it is encouraging to see more first-time buyers entering the market thanks to Funding for Lending scheme. Funding conditions have improved rapidly as reflected by the falling rates and higher numbers of mortgage approvals recently."
Similarly, Jonathan Harris of the mortgage broker Anderson Harris, pointed out: "The extension of the fundingfor lending scheme makes home ownerships more affordable, particularly as lenders continue tooffer better rates at higher loan-to-values, which means first time buyers dont have to drum up such a big deposit." The impact of these initatives is most obvious among newly built properties. Halifax reported this week that the average new build house price has increased by 12pc over the past five years to 233,822, thats 9pc higher than the average house price for all properties. The danger, as pointed out in this space from time to time, is that lax lending encourages buyers to overpay. After all, that's how the credit crisis started.Most of the western world is still living with the financial hangover created by a decades-long borrowing binge.But property remains unlike other assets because a large part of the "return" for home buyers takes the form of avoiding rent they would otherwise have to pay if they remained tenants. Unlike stocks and shares you cannot oupt out of housing unless you live in a cave or underneath a bridge. Another key difference between property and most other assets is all capital gains on your home are tax-free. No wonder generations of Brixtons have prefferredbricks and mortar to any other means of accumulating wealth.
Nor is it necessary to get bogged down in the macroeconomics. Which would you prefer 25 years after movinginto your new home as a buyer or a tenant; the title deeds to a property or a pile of rent reciepts and three months notice to quit? Recent events have, however, demonstrated how dependent house prices are on mortgage availability and costs. While availability is improving, costs can hardly get lower and could rise substantially. Interest rates are likely to rise in the future and, if this happens suddenly or sharply, then house prices may fall. there is nothing theoritical about the fact, as thousands of forced buyers discovered to their cost 20 years ago. The problem for pessimists, waiting to pick up a bargain, is that they must waste money on rent in the meantime. The history of housing in Britain can be seen as the triumph of the optimists. but a trend is only a trend until it stops.