What exactly is going on with house prices?

After a series of surveys saying the property market has recovered strongly in the last few months the Halifax announces that prices fell in January.

So what on earth is going on?

Well, the first thing to note is that there are a large number of different house price surveys, each with a different method of assessing the market.

The Nationwide and Halifax surveys are based on prices at the mortgage approval stage of the buying process while official data from the Office of the Deputy Prime Minister (ODPM) measures prices at completion. The monthly survey by Rightmove.co.uk, the estate agency website, is based solely on asking prices.

Critics of the building society surveys say their data is distorted because it only measures prices for properties they are lending on, which are traditionally concentrated in different parts of the country.

Opponents of the ODPM survey say it lags the market because it is based on completion prices - which are usually two months or more behind agreed prices.

The obvious flaw in the Rightmove survey is that it measures on asking prices – which are often based more on wishful-thinking than reality – particularly in a stagnant or falling market. Many people also argue – probably unfairly - that mortgage or estate-agency sponsored surveys have an inherent interest in talking up the market so cannot be relied upon.

Another flaw in each survey is that the headline figures are simply national averages that often bear no resemblance to what is happening locally. Continuing double-digit price rises in Northern Ireland and Scotland, for example, are dragging up the national average, and do not correlate with the experience of sellers in the South -West.

But none of these factors accurately explain why today’s Halifax survey has shown that prices are falling after three months of gains. To explain that we might have to consider a separate theory, one which I will call the house price yo-yo.

One of the most significant factors driving prices is affordability – or the difference between what the average house costs and what the average person is earning.

After successive years of steep price rises and only moderate pay increases this “affordability ratio” has become stretched – almost to breaking point as any first-time-buyer will tell you.

So every time prices surge forward, as they have done in the last few months, the “affordability ratio” become too stretched and buyer interest quickly diminishes. With less buyer interest owners realise they have to moderate their demands if they want to sell so they accept lower offers, bringing down average prices. This in turn increases the interest of buyers, which renews seller confidence and so prices rise again and the cycle goes on.

Of course, people might argue that affordability ratios have been stretched for a long time and prices have continued to rise. But what people forget is that while prices have gone up, long-term interest rates have fallen to historic lows. This means that buyers have, up until now, been able to afford to borrow more even if they are earning relatively less because repayments are cheaper.

If this yo-yo theory is correct, we can expect to see average prices going through short up-and-down cycles for the next couple of years with the overall result being only moderate increases in home values- probably of no more than 4 per cent a year.

I'd be interested to hear your thoughts and experiences of what is happening in the property market so post your comments in the form at the bottom of the page

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Comments

[Liz]

Aawwww! Bob Sturgess and others take note of Emma's plight!

[Emma]

Quite frankly, I get rather riled by people with large 'portfolios of buy-to-let property'. These are not investments, these are HOMES. Homes which, because of your investment antics, are not longer affordable for large sections of society.

I'm one of those poor suckers who puts food in the mouth of a 'buy-to-let baron'. When I graduated in the early 90s I went in to a job that I love, that makes a difference but isn't very well paid. I'm single and I don't have rich parents. I work 6 days a week to clear £1,500 a month Net and £1.325 of that goes straight back out again in rent, council tax, utilities, phone, food and running a small car. I have no debts, but neither do I qualify for a mortgage of the size needed to buy *any* property in the area I live in where £180,000 is the starting point for the most basic of abodes. I can only afford to go out once a month; a 'treat' like a trip to the cinema. I spend about £200 A YEAR on clothes and I've not had a holiday in years.

So, perhaps I should feel grateful that these buy-to-let barons allow me to have somewhere to live? Well, sorry but NO. Despite spending half my monthly net salary on the rent, the house I live in isn't my home. Why? Because landlords make very sure their 'investments' are protected against every conceivable threat. In order to rent this house I had to agree to not have children (amazing that a landlord can dictate my reproductive choices, but there you go!), not smoke, not become unemployed or redundant, not have anyone to stay for any period, not run a business from home, not decorate or hang anything on the walls and not have any pets whatsoever.

In return I had to go through a credit check, supply work and character references, pay a massive 6 weeks deposit and have to suffer little inconveniences like waiting a few weeks for any problems to get fixed (broken boilers in the middle of winter being my favourite!), putting up with hideous painting/wallpapering choices even though it's ME who lives with it year after year, not the landlord. I also had to give my cat to friends..despite the fact that accommodation was unfurnished so any furniture that could possibly be scratched is mine.

Living in someone's 'investment property' is not like living in your own home. You live under rules and regulations the landlords themselves would, no doubt, hate! And to top it all off, whilst I'm sitting burning more precious gas on an evening and wondering what it's like to be able to afford a social life, I get to reflect that these buy-to-let barons are responsible, in a great part, for the current house prices and the plight of people like me.

[Puzzled]

If there is a pandemic caused by humans being affected by Bird Flu throughout the world this will be a sobering effect on property prices.

[George B]

I agree with Crazy Kekks that anybody still in the UK buy to let market who hasn't balanced out his portfolio with other investments is a fool.

I also think that people are far too complacent about the security of house investment. While 15% interest rates are highly unlikely ever again, it won't take anything like that to cause the next crash. Many people would be caused significant pain by even a 0.25% increase in interest rates. 1% would wipe millions of them out.

Althought most of the pundits are predicting interest rates to fall, it is far from impossible that they could rise 1% too. (Bear in mind that most of the pundits were also predicting a particularly harsh winter this year.) Given that these predictions of a rate fall are based on a disappointing economy overall, it also means that the threshold at which an interest rate rise (or other shock) will cause a crash is coming every closer.

House prices may indeed carry on doubling every 6.8 years. But they are a very long way indeed from being as safe as people think they are.

Finally even if they do keep rising on average, you need to have sufficient assets elsewhere (e.g. cash) to able to hang on through the (inevitable?) trough. The people who don't have this are the real losers. They are the people who sold at the bottom of the share price crash in 2000 (perhaps because they also lost their jobs) or those who sold in the last property crash. The winners are those who can afford to hang on in the bad times as well as the good. Looked at this way, there is very little difference between the long term returns on housing and share equity. Given that our markets are pretty liquid, this isn't really very surprising.

[Kaz Wilson]

Buy to let activity is starting to decrease. I would expect that the overall market will decrease slightly but to level off at between the three and five percent appreciation mark.

-Kaz
www.4mysales.com

[katherine kirk]

Just saw today's article about parents funding their graduate children's house deposits (anything to get them out, I suppose) - so here's another ready source of inflationary cash to add to my list (above) - "equity release" mortgages based on the value of the empty-nester's family home - the value of which keeps going up, of course, because of bidding between other graduate children propped up with similar equity-release schemes...freaky, eh? Going back to the original question on this thread, I don't think "affordability" is as important as you would think - there is a lot of non-earned cash stoking this bonfire, and the government is doing precious little to redirect the flow away from housing. Nor are they doing much to reassure people that they don't need some sort of major private tangible asset - like a house - as collateral to cover major expenses which most people didn't used to worry about, like school fees or hospital bills. Why doesn't the government encourage people to buy hospital or education bonds instead?

[katherine kirk]

Maureen Berry was right that it's all about the availability of money. Like Alice and the Red Queen, everyone is running faster and faster to stay in the same place. The basic problem is the conviction that owning your own home is the safest route to financial security, but there are others. Here are some factors I've noticed inflating the family house market since 1997:

(1) Strong public and social pressure on women to return to work after having babies, and the need to find a justification for it;
(2)London property prices being inflated by City bonuses and foreign property investors seeking a safe haven;
(3)Council tax breaks and huge income tax breaks for taxpayers who buy second,(third, fourth) properties as holiday homes or for let. This is particularly corrosive because it spreads the influence of City bonuses beyond penthouses and country estates to multiple lots of the nicer sorts of houses that ordinary Britons would hope to buy. (Why the government thinks this is a good idea is beyond me).
(4)The proceeds of the sale of inflated London homes, together with a second income, being used almost tax-free by "downsizing" young couples to bid up the prices of family houses in regional cities. (The evidence for this is that notwithstanding the five-fold increase in house prices, local incomes - including those adopted by the downsizers - have remained almost unchanged);
(5)inflated proceeds of the sale of family houses by "downsizing" or deceased grandparents being given (again almost tax-free) to the next generation to bid up the price of family homes further;
(6) real problems with transparency and risk management on the stock market; and disillusion with the pension industry;
(7) of course, cheap mortgages and fading memories of the horrors of negative equity and galloping interest rates in the 1980s.

None of these sources of inflationary cash seem likely to fall off soon. Short of some horrible economic meltdown a la 1988 (remember interest rates at 15%?), two things could be done to change the situation. One would be to reduce the obsession with "owning your own home" by stimulating a reliable, affordable rental market for decent family homes. Possibly even more powerful would be to reorganise the tax system to discourage second homes (the current system doesn't seem to be producing much of a rental alternative - wonder why?). Until then, the landed rich will get richer, and the landless poor, poorer.

[Jonathan Poole]

Houses will sell for whatever the fools who buy at these prices are willing to pay for them, personally i'd rather slit my own throat than pay current prices. and enslave myself in a lifetime of debt.

you people who are buying at these prices are doing a permanent and sickening damage to the economy of this nation. house prices must come down or we will loose a decade or more like Japan.

[Ignaz]

Mak, buying at the peak of a cycle is not a good idea!

[Ignaz]

As an investor of many years standing,I'm getting out and quick!The only good returns lie abroad these days. Those investors still purchasing BTL in the UK are inept. The returns are terrible - many recent purchasers are actually losing money on their investments.

[Crazy kekks]

First time buyers are the underpinnings of the market. If anyone wants to move, somewhere down the line the 'little guy' has to step in to make all these purchases move up.
Only problem is that the market is now no longer affordable for first time buyers, with flats going for upwards of £100k, the only people who can afford these modest abodes are the higher end of skilled and white collar workers.
Have a look in the job pages of your local rag and see the amount of jobs up for grabs that could support these new 'luxury apartments'. Not very many, and the people who do fill these jobs would not be interested in these shoe boxes anyway.
I have a feeling that there are going to be a lot of flats available for the local authories to buy up and rent to council tenants in the near future.

[mak]

I am planning to buy in the next few months but the survey reports are so confusing that I am never clear as to whether it is right time to buy.

[Bob Sturgess]

As a Buy-to Let investor that started in 1997 and now has a portfolio of more than 100 properties, I thought your readers might be interested in my comments:

The housing market is now clearly split in two and the rise in prices is of interest to both groups for different reasons. Price rises for home owners in the main simply creates a comfort factor. If the home owner is not buying or selling, it makes little difference unless they do something with the increase in equity ie a drawdown and then do something life changing with the newfound funds (assuming affordability of the increased loan). This could be an extension to their existing home, a holiday home abroad or perhaps a new car. Some like me use that increased equity to fund their first buy to let.

The second group are the private investors (buy to let). It is no wonder that buy to let has become so popular. For my part I got fed up with investing in the stock market paying fees to professionals to produce no return. High returns in the stockmarket are through a limited number of succesful funds and in my experience, you are lucky to be the investor that had invested in one of these to realise the quoted gain.

The buy to let market is fun. You are involved in the whole process of choosing the area in which to buy, how much to invest, what type of property, even down to the type of tenant. This type of investment is totally underpinned by house price rises. Those of us in it for the long term, view the index to see how long the market is taking to produce the equity that can lead to the creation of deposits for the next purchase. The faster property prices increase, the quicker we can drawdown funds on the equity gain and buy the next investment.

The only loser I see as a result is the first time buyer. However, we should remember there are many good mortgage deals out in the market they can access and we cannot. The types of property that appeals to the first time investor is not generally the one that is ideal to landlords. I believe the future for first time buyers is in joint equity 50/50. This enables them to enter the market and take advantage of any equity gains, whilst giving some protection against market falls.

My view is that the market is affected by many forces, including:
1 Interest rates
2 Loan to value
3 Affordability
4 Land costs
5 Governments policy on new planning consent
6 New tax on planning gain as a result of new consent
7 Building material costs (rising)
8 Legislation controlling the employment of construction staff
9 Overall supply
10 Demand. This includes the fact that more and more homes are in single occupancy.

House prices over recent decades are known to have increased 100% every 6.8 years. 5% growth per annum in the current market is a safe bet. Do not read too much into one months or three months figures.

[agnes]

Let's all offer 20% less! All of us buying this year...

Lets face it, most people are living in houses that they themselves would not be able to afford to buy. The estate agenets and banks have made a fortune and the rest of us been burdened with frightening debt!!

In Europe low interest rates don't mean these high houses prices.
We should ALL say enough is enough and refuse to pay so much so. We should ALL offer 20-30% less to get these outlandish prices down...then we, you and I, the public can then take advantage of lower mortgage payments and low interest rates and use whats left in our pay packets to live a little, save for our pensions and pay our heating bills, and spend on our children without being in debt.

The only people that will make this happen is us, the buyers.....

[Fred]

The high price of houses has little to do with the availablity of houses, but is almost completly a result of the availability of money. The more people can afford, either through their own salary for a mortgage, or savings, or for example parents savings, the more prices will rise. In addition prices are unlikely to drop significantly, other than in a major and widespread crash, because people will just not sell houses at a significantly lower price than they paid whilst they can somehow manage to pay the mortgage.

[maureen berry]

The high costs of moving house (around 5% to buy and sell over £250K, 6% over £500K) must be acting as a brake on the market. The introduction of the 3% and 4%rates of stamp duty in the late 1990's coincided with the period of high house price growth, meaning that paying the tax on moving did not hurt too much.

Now, anyone who has bought in the last two years, and decides to move again, must find the tax (£9k on a house costing £300,000), as well as agent's fees of several thousands, lawyers' fees, removal costs, refurnishing costs etc. It is now very difficult to see where the average family moving house finds the necessary sum of around £15,000 to £20,000 to fund a move. They certainly are not financing the move out of profits anymore. Stamp duty has started to bite, as have inflated estate agency fees.

[marc]

This fascination with house prices continues. We must stop relying on house price inflation to fuel our own satisfaction index of personal wealth.

Prices are far too high. A salary of £100K buys a mortgage of £350K...what do you get for that. Rents are at a natural level and yields have fallen away dramatically. House prices must follow.

[M Brodie]

It would be naive to think that modest growth of 2-4% in the market over the next few years will suffice to keep the market going. Supply is just being stored up for future release which will create a property slump. Rents are also cheaper than mortgages now so the buy-to-let sector is unattractive to any new entrants, drying up one source of demand.

The whole basis of the market is price growth. Those who can truly afford their investments and aren't afraid of a value loss of 10-20% will stay in the market but eventually stagnant growth will scare most investors. Stagnant growth can't sustain the market because it works on the basis of a "property ladder" i.e. forever onwards and upwards. Now the gaps between property categories are far too high so if you buy for 200,000 and the value only increases 5% to 210,000, this doesn't give you enough of a return to move up to the next stage so the "ladder" concept won't apply anymore. The market only functions if there are big prices rises.

[Paul Jones]

I still don't understand how house prices more than doubled over a 5 year period. It baffles me, totally.

I am now looking to buy in around a year but it looks almost impossible to do so. How a figure of 150,000 on a small two bed terrace can be justified is beyond me.

[Peter Hinton]

Hi

It is always difficult to predict what will happen in this market. Thee are a number factors;

- interest rates
- affordability (as you point out)
- new house starts
- immigration

Clearly the interest rate level and supply and demand are critical. With 150,000 plus (net) immigrants each year demand for accomodation will increase.

Reading what is happening at present makes me believe that prices will show an increase over the next 2 years but only by a few percent. The mad market increases are gone for now...if they do happen there will be a crash as a realignment of that I am sure.

So our investments are safe!

Regards
Peter

[Brian Turner]

The really sad thing is that a lot of the housing market is almost certainly still being powered by people purchasing as an investment, rather than a home to live.

As a first time buyer, I'm just hoping investors notice the stock market is in a period of growth that beats housing inflation, and decides to push their money back there, so that house prices can become more realistic for domestic owners, rather than inflated by investor demand.