Peter McGahan: House prices
Do you think house prices will continue to rise and would you advise on investing into property now?
Readers of this column will no doubt remember how we forecasted the reasons for the current situation as far back as 2005 and why property would fall. Mid 2009 we agreed it would be a good time to buy property. It wasn't because we believed it to be cheap, it was because we believed the stimulus of lower interest rates and the impact of all governments fiscal policies would create some false confidence which could be capitalised upon.
And now would be a good time to capitalise on that i.e. consider selling.
There are many methods of valuing property and its worth. There is only one accurate one and it doesn’t necessarily relate to economics. Confidence brings with it irrational exuberance and the reverse is true of any negative sentiment.
Investors also have a desire to defend investment decisions. As most financial columns are written in the past or present tense you are none the wiser until after the event. Our columns always seek to look to the future by assessing risk and potential reward. Let's consider any potential for impact on house prices. You have supply, demand, and you have confidence.
Let's look at what will impact those.
Firstly, consider what yield you can get on a rented property and property in general. After expenses, which include stamp duty, legal and financial adviser fees, agency fees, costs of repair and the fact that occupancy is not always 100%, rental yields are well below 5%.
Whilst interest rates are low at the moment, this is emergency measures and with inflation soaring future interest rates can only go north. And so a yield of 2.5 to 5% (the norm on rented property) is hardly attractive over cash or an inflation proofed asset such as index linked gilts.
It is easy to use the argument 'ah but the property can increase in value to produce capital return' but that would be ill timed.
We await some of the biggest cuts in history which they expect us to be reeling from for twenty years. Public sector employees can expect vast wage cuts or freezes and there is an expectation of a considerable cull in employment. This is nothing new and was highlighted in this column over a year ago after our study of post global financial crisis. Unemployment is set to soar, wages will fall and that’s against a backdrop of higher prices through inflation.
All of this will squash demand as investors and potential homebuyers cannot afford the higher prices. The job uncertainty will certainly have a lasting impact on property demand.
Add to this the thought that capital gains tax will potentially be levied at 40% on non business assets such as second homes, demand will only fall further. Why would you hold all the risk of a property for so long and go through all the government-laden expenses of buying and selling it, to then see nearly half your gain disappear in one horrific cheque to the Inland Revenue.
During a rising market, many investors do not worry about the financial practicalities and so are blinded. It is only when markets become under pressure that the real risks can appear.
Moving into an uncertain market is not a time to be holding a 'fixed asset' such as property. I remember the last property downturn in 1989 where I couldn’t get a viewing on my property for six years, let alone get an offer.
The current smelly downturn was pretty much averted with a squirt of financial perfume which has come to an end. The real pain has yet to unwind. Remember that a fall in house prices is a fall in confidence as the UK use their house as a barometer for borrowing and spending.
The best time to buy property will probably arise in the next 24 months however when financial Armaggeddon is preached again.
If you would like mortgage advice or have another financial question, speak to Peter, 0845 230 9876, e-mail info@wwfp.net
Think carefully before securing other debts against your home.
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change
- Peter McGahan is the Managing Director of Worldwide Financial Planning - FT Award winning independent financial advisers based in Cornwall with offices across the UK. Worldwide have won 16 awards from the Financial Times in four years and are highly respected in financial circles as being experts and specialists within their fields. Peter McGahan writes for local and national publications such as the Western Morning News, Cornish Guardian, West Briton, Financial Times, Channel 4, BBC, Tiscali Money, Yahoo Finance and various other media. If you have a financial query and wish to speak to a dedicated adviser, contact Worldwide Financial Planning on 0845 230 9876 or email info@wwfp.net
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3 Comments
by Michael, Exeter
Wednesday, June 16 2010, 8:01PM
“Exeter house prices are ludicrous. They are somewhere up there with bristol, yet the houses are all cut down versions of bristol properties, and exeter city has neither the scene nor the wages to match.”
by Simon, devon
Monday, June 14 2010, 1:07PM
“Having spent the best part of 20 years in property both management and investment, I am flabbergasted by the general delusion about house prices in Exeter being somehow immune from what has been happening throughout the UK.
I constantly here the expression "Exeter is different" - why? The reply is generally that the city has strong employment within the public sector, MoD, County Hall, The Met Office and the university however, as Peter points out; it¿s the public sector that needs and will be culled. The private sector has had to take drastic action in either cutting staffing levels or made reducing hours ¿ why should the public sector escape?.
I too remember vividly, the late 80¿s when I ventured in to property, the volume of repossessions, job losses and misery however, house prices came down with a bump, in what seemed to be, a very short space of time. However, having looked back at the statistics, the decline came in peaks and troughs, very similar to what is currently occurring. Over a period of 5 years, the Westcountry (and that includes Exeter!) witnessed, on average, falls of over 35%. Interestingly, we had, prior to that crash, experienced one of the highest increases in values outside of London.
This time round, history appears to have been repeated. House prices in Exeter have increased by as much as 220% over 8 years, yet incomes have steadily risen by only 3-4% per annum. One of the fundamental reasons for price rises in Exeter was the move from Bracknell by the Met Office. Estate agents in the city saw this as the Holy Grail and were actively talking up the huge benefits to house prices generally. If you speak with your average Met Office employee, they were shocked by the rapid rise in prices which correlated with the announcement of the move from Bracknell. Some could not afford to buy in Exeter and had to buy in the outlying, cheaper areas. Interestingly, house prices in Bracknell were, prior to the relocation announcement, on a par with Exeter but this rapidly changed.
Now, as part of the spending review, the Met Office is being considered for sale (also by the previous government) and I suspect, could be sold. Then what? Combined with cuts in the public sector which, according to today¿s national press, account for 24% of employees in the South West, house prices in Exeter will, overtime, decline. They are likely to remain stagnated for many years as the private sector picks up the slack. This is good news. Incomes in Exeter are low compared with say Taunton or Bristol and the days of 5,6 or even 10 times income multiples in regard to mortgages are long gone. House prices, like all markets will, if left alone, correct themselves. The introduction of quantitative easing and making it harder for lenders to take possession of properties, only serves to delay the inevitable. Stimulating our economy through low interest rates, fanciful predictions in our economies future growth and creating employment from nothing (government) has backfired ¿ the cupboard is bare and the treasuries credit card, maxed out and you cannot use your home as a cash machine anymore!
The majority of people tend to think selfishly about house prices and fail to consider their own children and even, their grandchildren. How on earth do people believe that house price inflation, on the scale we have witnessed, could possibly be good for them? Do you really want them living at home forever?
The current market in Exeter is swamped with unsold flats and houses which, using software that attaches to rightmove, clearly shows daily price reductions (exaggerated values by some estate agent?), sales falling through(stricter lending criteria?): a step in the right direction but still further falls to come.”
by David, St Austell
Monday, June 14 2010, 10:47AM
“Unfortunately I still remember the days when people bought houses to live in. I have nothing against houses being bought to enter the rental market but there is something morally wrong in properties only occupied a month a year which leads directly to the decline ,and death in some cases, of communities. As for potential housebuyers not being able to afford them because of the wages freeze this situation has existed since the eighties when prices were allowed to reach ridiculous levels. I don't see anything can be done to bring prices to a realistic level so councils must start building more social housing for rent. People are living with their parents for far longer than is desirable because of this. Low wages together with high house prices is not a good combination.”