All time record house prices!

Whilst I’ve been worried about a house price slump due to Covid, the reality is that house prices are hitting record highs! What does this mean for homebuyers and homeowners?

I’ve written recently about my concerns for the property market, my disappearing housing equity and being slightly tempted by property investing. But this news has surprised me this week as according to the Nationwide Building Society’s house price index:  

  • House prices recover from recent dip to reach new all-time high in August
  • Annual house price growth picked up to 3.7% in August
  • Prices up 2% month-on-month, after taking account of seasonal factors, as momentum builds

You can read this full release here: LINK but a picture says a thousand words.

Nationwide House Prices over the last 10 years

Record house prices might seems a little counter intuitive, the world has certainly not improved in the last year and the expectations are that the fallout from Covid will leave millions unemployed, companies weakened, demand in the economy slumping and government debt skyrocketing. Who know what’s going to happen – but higher house prices were not my gut instinct to this crisis. This is based on the fact that there will be less money in the economy and who wants to buy a house when you are not sure of your job (like millions of people are).

However, the stamp duty cut that was announced was a welcome boost to those who wanted to buy and that’s probably fanned the flames of house price inflation. It certainly has done in my neck of the woods.

A very strong recovery in House Price Inflation this year

Who’s buying all the houses?

I don’t know, but I reckon that like in any crisis, the rich get richer and the poor are keep on getting their housing benefit. And in a world of ultra low interest rates, the allure of Buy To Let for many is still there. Property is something which you can easily understand and people are comfortable with it as an investment class. Also since millions of middle/upper middle class people all over the world have had their discretionary spending curtailed this year – no holidays, private jets, eating out, travel and so on, there’s lots of spare cash for investment.

Is House Price Inflation Good Or Bad?

Inflation tends to be seen as a bad thing – price of bread or milk or petrol going up is a huge problem and can spark riots/resentment/revolution. But when it comes to the cost of shelter getting progressively more expensive and out of reach of many, many millions of millennials and GenXers like me and I suspect you, it’s a good thing. That’s because the owners of property benefit and it helps pay their way in life. Property is my pension and all that.

It’s not all bad news though, I own a home that makes up about 25% of my net worth. If the price of that asset goes up then I get richer. The fact that I have two kids who need somewhere to live in the future is there problem. I’m all right Jack.

For a more authoritative view on house prices, the book by Leo Grebler is great (if you like economic theory – US focused btw).

House Prices to Earnings Ratio – worth thinking about.

At the moment, UK house price to earnings ratio is sitting at about 6 or so. Obviously it depends a bit on where you live – it’s higher in London than it is in Scotland for example. But you get the idea. In the 90s you could buy a house at 3-4 times your earnings. It’s now almost double that. Showing that not only have house prices gone up but that they’ve gone up more than your wages!

It’s worth pondering what “earnings” means. It’s taken here as the average UK full time wage of about £35,000 at the moment. That’s before tax, national insurance, pension contribution, costs of work and student loans. When viewed through this prism, house prices are very expensive relative to earnings.

But at least mortgages are cheap!

That’s what a lot of people say, but cheap mortgages on expensive houses are not as good as expensive mortgages on cheap houses. And for every drop in interest/mortgage rates, it just pushes the property price up even more. The only solution is to live in perpetual debt.

Outlook for Property Prices?

I really don’t know. What I do know is that rising house prices trap more of the country’s wealth in property which is unproductive and less is available in the real economy. Diverting money to be recycled into bricks and mortar isn’t going to help us long term and the long term impact of ever more unaffordable house prices and rents means that the best and the brightest may opt to move away from the UK to nicer places.

On a separate note, I got a nice document for my SIPP & ISA provider saying that my investments went up about 15% in the last year. That beats the 3.7% of house prices easily. My view is that whilst you do need to live somewhere, you shouldn’t rest all your hopes on property to make you rich.

Thanks, GFF

9 Comments

  1. I’m not one of those 20 somethings that endlessly moans about property prices, but I am starting to struggle to see light at the end of the tunnel as someone that doesn’t have a second person’s income or that high a wage.

    And I’m one of the few cases where I’m lucky to be able to save a fair bit – I dread think of my peers who are less fortunate than me.

    In my area the current average house price is a little over 14x my salary, and I don’t ever live in or near a big city or the London commuter belt…what’s that we’re always told is the maximum banks will lend? 4.5x your wage? whelp…

    Liked by 2 people

  2. Beautiful houses!
    Looking to talk to people in the area about a documentary I’m making and wondering if you wouldn’t mind?

    Regards,house to let london

    Liked by 2 people

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