Prices have risen for so long that a market crash will be very hard to swallow
Martin Stewart is managing director of London Money
Is the housing bubble about to burst?
If anyone tells you they know the answer to that question, they are lying. It would probably be easier to answer whether there’s life after death.
The warning signs are there. Property is overpriced; it always has been and always will be. Just take a look at the rebuild cost on your buildings insurance policy to see the disparity between how much your house is worth on the market and how much it’s worth as bricks and mortar. The difference between those figures is supply/demand and location, nothing more.
In London, especially, property prices haven’t just lost touch with earnings, they’ve lost touch with reality. Yet London has always told a different story to the rest of the UK; it’s an economic powerhouse in its own right. The constant flux of people in the city, looking for work or a particular lifestyle, means that demand has always far outweighed supply and that continues to drive prices through the roof.
As for how it will end – or even if it will end – there’s no way of knowing. What we do know is that prices have risen for so long now that a prolonged house market crash will be hard to stomach for everyone.
However, what I call a crash and what others call a crash are very different things. A crash, in my mind, is something that has a fundamental effect on everything and makes you think twice about investing in that sector again. Apart from during a brief period of 2009, that fear hasn’t really crept into the housing market. So have we been lucky and avoided a “crash,” or are we just kicking the tin further down the road?
If the latter is the case, then what can fiscal policy makers do about it? As the old adage goes, those who fail to learn from history are doomed to repeat the mistakes of the past and if we don’t start remembering where loosening credit got us before, we’re almost certainly doomed.
There have been two million houses taken from the supply chain due to BTL investors in the past 20 years. If the base rate reverts back to the long-term trend, a vast majority of homeowners could be unable to maintain their mortgage payments. Banks have been lending at rates not seen since 2007 and if house prices were to slip back to even 2011 averages, many of those mortgages will be underwater – in fact, just a few days ago, the Bank of England warned that booming Buy-to-Let mortgages could pose a threat to the UK banking system should house prices fall.
It was debt that got us into the financial crisis, yet debt markets are actually 40% higher than they were in 2007. What exactly have we fixed? That said, taxation has the potential to affect the housing market much more than policy. The top end of the market has suffered since the change in stamp duty hit transactions of £2 million and over. The same could happen to the BTL market after George Osborne announced an additional 3% stamp duty on BTL in his recent budget. My advice to anyone taking on any form of debt is not to over leverage yourself. Debt is too easy to take on but very difficult to shake off.
If you’re a homeowner looking to move in the next five years, gnawing your fingers to the bone while you read this cheering pre-Christmas property column, relax. Just do it. Don’t think about it. Buy the best house you can afford on the best street for your budget. The rest is out of your control. If you think about it too much you will be paralysed by the sheer stupidity of how much importance we put into owning property. We all need somewhere to live, but here’s a radical thought – compromise. You can only ever be in one room at a time, after all, so make it a nice one but make it affordable, both now and in the future.
Martin Stewart is managing director of London Money. Martin has worked in Financial Services for the past 22 years and in that time has gained a wealth of knowledge and experience. Martin believes that financial planning should follow the London Money mantra of being simple and smart and he takes that approach with his clients regardless of their position. Follow them on Twitter.
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