For as long as I can remember house prices have always been on a long term upward scale. Take just about any two points ten years apart and you’ll find that property prices are higher, usually substantially so, at the more recent date. So just what are the drivers that deliver this inflation over time and why do we see such significant and sudden upward downward price pressure typically know as the “Boom and bust cycle”?
Firstly let’s look at a couple of statistics to illustrate this continual long term climb in house prices. Since the early 1970’s the average property has grown in value by an average of around 3% per year, according to the Nationwide Building Society using real house prices. I recently came across a case where a friend of a friend had bought a property 31 years ago for a little over £13,000. This property was sold by the same person in 2010 for £1,300,000 – almost 100 times its value 31 years earlier.
There are three primary factors which drive house price inflation and these in turn lead to a fourth. It is when all three primary factors are at their peak that they fuel the fourth to a level that generates a house price boom and conversely when one or more of the three primary factors is lacking that the fourth disappears and the inevitable crash follows very quickly.
Supply & Demand; Affordability; Employment: these are the three primary factors and clearly each one of these is a complex area in its own right. When the supply and demand dynamics are in the seller’s favour, affordability is high and the long employment prospects are good then the fourth is created – Confidence. With confidence in the market underpinned by the three primary factors there is only one way in house prices are headed and that is up and quickly – a property boom!
If even one of the three primary factors is not fully playing a supporting role then confidence reduces and the housing market relaxes back to a more long term sustainable level of what most of us would call “Normal growth”.
When one or more of the three primary factors is heavily compromised or effectively removed then the confidence in the market is massively reduced, often very suddenly, sometimes sparking panic and the inevitable crash follows shortly.
If we look back we can see how the cycles are clearly effected by these primary factors. In the late 1980’s the Government at the time announced a measure to cut double MIRaS (Mortgage Interest Relief at Source). This was a small amount of tax relief offered to mortgage holders and was available to both unmarried partners buying a property jointly. The announcement was to take this away and only allow one person to claim the relief, as was the case for married couples. This notice of future reduction in affordability gave rise to short term very high demand and led to a high degree of confidence and a boom. The following bust in the early 1990’s was created by much higher interest rates, hitting the affordability element and together with rising unemployment figures led to a sudden and dramatic fall in confidence.
Our current housing market price falls have been caused by the reduction in availability of mortgage products and their changing terms which has impacted on the affordability element through the supply and demand chain which has led to a significant drop in confidence.
It is not all bad news. Let us not forget that if you are able to borrow, the cost of borrowing is relatively low at present and house prices are also greatly reduced from two or three years ago. Therefore it could well be a good time to buy a more expensive home.
Paul Cooper
Joint Managing Director