And so it comes down to one simple belief versus another. On the one hand you have the view put forward by David Miles, chief UK economist at Morgan Stanley and former advisor to the government, that the property market has been driven upwards by a kind of mass consumer based speculative frenzy. On the other side of the fence, the property bulls are arguing that the booming property market has nothing to do with speculation, rather it’s down to the forces of supply and demand, with too few properties, kept down by planning restrictions, meaning that this time the higher prices are sustainable. There seems little room in between. Either you are with Mr Miles, and a crash is round the corner, or prices will just keep on going up.
Mr Miles is not the only bear to have come out of the wilderness recently. Last month PWC said there was a one in three chance house prices will be lower in 2010 than they are today, and perhaps even more alarmingly, a 13 percent chance they will be lower in 2020. Last week the FSA warned banks to allow for the possibility that house prices could fall by 40 percent.
But the latest theory, if you could excuse the pun, is by miles the most bearish we have seen for some time. The pessimistic theory is based on the belief that home buyers are being driven forward by the fear house prices are going to continue their rapid rise, so they are jumping on the ladder as quickly as possible, which in turn distorts the market. Mr Miles reckons that at present, buyers believe house prices will increase by ten percent a year, and in the short run that belief becomes a kind of self fulfilling prophecy, with over half the recent rises in house prices driven by speculation.
In short, house prices are rising faster than can be explained simply by citing income growth, a rise in the population or by lower interest rates making mortgages more affordable.
If the property market was a ball at the end of elastic, then the Miles theory would suggest speculation has stretched that elastic to its limit, and that at some point it will come swinging back, too far in the other direction. But the timing, says the economist, is hard to predict, although he said this adjustment could come in the next “one or two years.”
Yet, while Mr Miles enunciates his bearish theory, there is no shortage of apparently equally qualified and esteemed economists, who disagree. Let’s face it, previous predictions of a crash have been proven wrong, and right now we appear to be at the top, or at least near the top of the interest rate cycle, yet the market is in rude health. It’s true that there’s normally a time lag of several months between a change in the rate of interest and an adjustment in the housing market, but in the past the index from RICS (Royal Institute of Charted Surveyors) has reflected a changing climate very promptly, and the latest score for this index was the highest recorded in over two years.
On the day the press were full of Miles’s theory, Paragon Group, which is the third largest lender in the Buy to Let market, had a very different tale to tell.
According to Nigel Terrington, chief executive at Paragon, the Buy to let market is looking good. “There is a bulge in the number of the 20- to 30-age group coming into the market and they can’t afford to buy or don’t want to buy and that will keep yields strong for at least the next 10 years,” he said yesterday.
In the end perhaps it all boils down to this. Where do First Time Buyers who can’t raise the deposit go? Do they stay with parents? Or do they rent? If they rent, then the yield to landlords will be strong, and Buy to Let investors will take up the slack left by First Time Buyers.
On the other hand, if the problem haunting these frustrated younger people, who have not yet made the plunge into the property market, is not the cost of raising the deposit, rather it’s simply the cost of making the mortgage payments, then, since landlords have to price the rent they charge at a level which covers the rate of interest, they won’t be able to afford the rent either.
Ultimately, though, the deciding factor could boil down to how debtors cope with an environment of low inflation. The rate of interest might still be low in historical terms, but the debt still has to be re-paid As inflation is historically low too, there’s no significant prospect of the value of debt being eroded by rising prices and wages, like it used to be. For as long as mortgage debt in proportion to income remains high, and, thanks to low inflation, this will remain the case for some time, we are always vulnerable to a shock. The shock may never happen, but whether it is next year, the year after, or in ten years time, if it does occur the ramifications could be serious.
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