London Central Portfolio Limited founder’s inaugural column about why Vince Cable and the doomsayers have got it wrong
After years of nothing but gloomy predictions concerning the weak UK housing market, recent weeks have seen a total reversal of the trend.
If the latest outbreak of media and political paranoia is to be believed, the once never ending post-recession slum years have in a matter of months completely reversed themselves. Things are now so good, that they are in fact too good. And when things are so good, apparently there is only one possible outcome – property bubble-driven Armageddon.
This is all very daunting except for one little contradiction; the facts simply don’t support this current revival of alarmism. We are nowhere near property bubble territory just yet and have years more of growth to look forward to. The only danger we face is ministers being overly zealous and cutting off the welcome recovery prematurely in a pique of political spite.
To some government ministers, led by Business Secretary Vince Cable, we are now seeing “serious housing inflationary signs” following an encouraging 1% monthly price rise for England and Wales in July and a report that we have seen a significant boom in the number of real estate workers.
The Royal Institute of Chartered Surveyors added fuel to the fire last week by suggesting limiting house price inflation to 5% a year. But analysis of data produced by the government itself, and analysed by London Central Portfolio (LCP), has revealed that fears of a house price bubble are premature. In a fragile economic recovery, it would seem ill judged to dampen the small sparks of hope for many UK home owners.
According to the Government’s Office of National Statistics, average annual price growth in the UK has been 9.4% since 1969, the date from which the data is published. This represents a doubling of values approximately every seven years.
Current price growth in England and Wales is vastly under the long term average. According to the government’s other house price data set, the Land Registry House Price Index, published since 1996, growth has been an average of only 0.67% per year over the last seven years (July 2006 – July 2013). This equates to an average fall in real prices of 3.1% p.a.
This compares with growth of 13.22% p.a. in the previous seven year period lasting from1999 to 2006. This reflected the recovery of the UK housing market after the price doldrums of the 1990s and a boom in the economy. Few, if any, commentators reported a bubble then, suggesting that house price rises are taken for granted and, indeed, welcomed in a dynamic economy. …
Having observed the long term growth trends in prices over the last 40 years, LCP reported in 2006 that UK house prices had finally corrected themselves following the downturn in the 1990s. Indeed, growth started slowing that year, well before the credit crunch.
So, the fall in prices of 17% in 2009 was not a kick back from growth in the early 2000s but a result of the UK hitting a brick wall during a period of global meltdown. A significant uplift in prices can now be expected as the economy improves. This will be a market correction, not atypical or repellent inflation.
Politicians must avoid acting rashly. Their recent statements are not helpful and should be tempered by a proper understanding of market dynamics. Residential property prices in the UK move in cycles. Periods of growth are generally followed by periods of consolidation. A rise one year may be offset by a fall in the next. Capping growth at 5% a year, as RICS suggests, completely ignores this dynamic.
Pricing in the UK housing market is based on supply and demand. It commands a price based on intrinsic value, which is pushed up by its relative scarcity. It is not being artificially inflated by homeowners wanting to make a quick buck. In fact, the average length of ownership of a home in the UK is 23 years.
Market manipulation is a dangerous game because the fall-out cannot be predicted. Politicians should get to the heart of the problem. Rather than wishing away the economic recovery or trying to hold back prices artificially, they need to build more houses. Providing the public with the homes they need at prices they can afford. Only this can avert the onset of wider gloom.
Brief bio: Naomi Heaton is founder and CEO of London Central Portfolio, residential investment experts and fund managers. A leader in its field, LCP is a specialist advisor focusing on Prime Central London. With over £0.5bn assets under management, it has an extensive private client practice and has successfully brought three funds to market, exclusively targeting this sector. Heaton is also regular columnist for newspapers such as the Evening Standard and Telegraph. The LCP team can be found tweeting at @LCP_Ltd