Investment Markets » Construction and Property
How Wobbly Are House Prices?
The boom is over, but will there be a crash? Britain's overheated buy-to-let market may make it more likely.
On the principle that even a broken watch tells the right time twice a day, those who predict a house price crash will one day be proved right. Has that time now arrived?
Property data is notoriously contradictory, but the majority of signals are pointing downward, and nervous eyes are being cast across the Atlantic where prices in some areas are in freefall. Notwithstanding the grim forecasts of www.housepricecrash.co.uk (no prizes for guessing its views), such an apocalyptic scenario remains unlikely in Britain, though the market is certainly slowing.
A good thing, too. Falling affordability is a social problem for millions. Ultimately, the economic fallout from a continuation of that scenario would be far more damaging than any nasty short-term shock. So far, so much like 2005, when property growth slowed only to accelerate again. But with interest rates substantially higher and prices even more stretched relative to incomes, the outcome may be very different.
The argument routinely used to justify Britain's high property values is the shortage of supply. But because prices are now so inflated, a change in the psycology of marginal buyers – investors and new homeowners – could cause a large swing in the market.
We may not have yet reached a tipping point, but when it comes, the results are likely to be dramatic. Over the past decade, there has been a profound motivational shift in Britain: partly because of lost confidence in pensions, real estate has become the ultimate reserve currency. Buyers are not just seeking accommodation, but an investment.
It follows that if property begins to appear a sluggish investment... there will be an accelerating exit.
There are already some pretty horrible stories coming out of the buy-to-let market, particularly in former hotspots such as Manchester, where rent yields on new developments are less than monthly mortgage obligations, and property prices are falling.
The Council of Mortgage Lenders is lobbying for greater state support. There may be little sympathy for buyers in this predicament; but time will show that many have been ripped off by unscrupulous developers and banks.
No one accuses the victims of share mis-selling scandals of being greedy and foolish. Perhaps it's time we took the same view of the ever-growing number of ruined lives that the buy-to-let collapse will leave in its wake.
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