Are we in a property bubble?
Despite experiencing economic downturns, house prices have grown significantly in most western economies during the Covid pandemic. In fact, average nominal house price growth has accelerated at its fastest pace since 1990 in OECD countries in the first quarter of 2021.
Average Annual Change (%) in House Prices in OECD
Source: FT & OECD
Why have house prices gone up?
The obvious question many people will ask, what is causing house price growth? There are a number of reasons why these have occurred; including,
Government Housing Schemes
In a bid to prevent a significant loss of confidence in housing markets, governments have implemented short-term schemes to underpin markets. For example the UK government’s stamp duty holiday.
Furlough and Business Loans
Even the most conservative governments have introduced furlough schemes and short-term business loans which have protected household incomes and prevented significant increases in unemployment rates. Meaning that for many households, their household incomes have remained relatively stable.
Increases in savings
Some largely wealthier houses have actually been able to increase savings levels. As higher paid workers, particularly those who work in professional services who have been able to work from home have been able to maintain their incomes and have saved significantly as travel bans have reduced commuting costs. Additionally, lock downs have reduced discretionary spending as bars, restaurants and other entertainment venues have been closed.
These market anomalies have occurred at the same time that mortgage interest rates remain at record all time lows, as well as significant shortages in the creation of new homes. Both have contributed additional pressure on prices .
House price growth has not been distributed equally
One of the major differences this time versus historic periods of growth is that house price growth has not been equally distributed. House price growth has not been in central locations in the apartment markets. The following has occurred:
- House prices have grown at a much faster rate in smaller towns and decentralised locations
- Detached and semi-detached houses have grown in price at a much faster rate than apartments
- Rents have declined in inner city locations and increased in outer locations and commuter towns
Unequal growth distribution has been driven by an increase in working from home throughout the pandemic. Demand has increased for larger housing stock located further out of town and most major cities have been at a virtual standstill while economies have been put on ice.
So are we in a property bubble?
Are we in a property bubble? Or is this the start of significant market growth driven by pent up demand and low interest rates? The reality is no one knows.
The only thing you can be sure of is that analysis from major property experts around the world will be wrong. Just a reminder, none of our property experts forecast prices would increase during the coronavirus pandemic. Their consensus was that prices would remain flat in the best possible scenario or more likely decline.
My instincts tell me that pent up demand, significantly constrained housing supply, increasing inflation and low interest rates will likely mean prices will rise significantly over the coming years.
However, guess what, it doesn’t matter. You are being naïve if you think you can buy a property at the bottom of the market or forecast when the market will move into recession. Be very wary of anyone who tells you they know how to forecast to this level of accuracy.
As an investor, you can only take into account the things that you know. The following are things which are known.
- Interest rates are at all time lows, there is nothing to suggest that in the short to medium term they will increase significantly
- Significant shortages in the supply of new housing continue to plague housing markets, governments around the world have not been able to correct this situation
- There is a growing group of people who will no longer be able to buy a property and will rent for a longer period
- Both governments and lenders have consistently demonstrated in both the global financial crisis and the coronavirus they will do whatever they can to underpin housing market confidence and pricing
So sure, there may be a change in what some tenants are looking for in the short-term and there may be some movement in pricing. The reality is that our big cities are here to stay and whilst there may be some short-term correction in pricing, the combination of the demand/supply imbalance for housing and low interest rates, creates a floor for pricing. So the chances of a significant correction in pricing seems very remote.
Property bubble or not – it doesn’t matter
When you consider different investment decisions, you are either an owner or a buyer.
If you are an owner, the only thing you need to think about is simply is now a good time to sell? And if so why? If it is because you think the property is at the top end of the market then sure, sell.
But there is no point in selling if you have nothing else to do with the capital. The costs of taxes to sell as well as the opportunity cost of re-investing mean that you are probably far better off simply re-financing to remove equity.
If you are a buyer purchasing a property for long-term investment then property bubble or not, it doesn’t matter. Provided you follow the guiding rules and principles of investing.
Have a plan
Successful investors have a clear plan for why they are purchasing and how it fits in their long-term strategy. Why are you buying and what are you buying for? Are you buying for yield or capital appreciation? What ownership structure should you buy in, and why? How will taxes impact your costs to purchase, on income and at disposal impact your investment? Are you investing in tax efficient locations to achieve your long-term objectives?
If you have a plan, it will empower you in negotiations as you’ll understand the impact of a decision on your strategy and importantly you’ll know when to say “no” to a deal.
Do your research
You need access to high quality market data and you need to make decisions based on economic reality rather than highly biased property agency research reports.
How can you make a good investment without access to data and the ability to understand what a good outcome looks like?
Make sure you are buying with a clear line of sight as to who your tenants will be. You need to research the local demographics and economics to ensure that you will have a large enough potential tenant pool to generate the rental income you are forecasting.
You need to prepare a cash flow of your potential investment and stress test it.
Have a network
You need a strong network of professional relationships. Use your network as a sounding board to sense check decisions. Do not follow the crowd and buy because everyone else. Have your finger on the pulse and stay connected.
Your network will be a useful sounding board to determine whether or not your assumptions and purchasing logic are sound.
You need to have detailed understanding of how the development cycle works and more importantly where the pain points are for developers. You can leverage this to create win/win deals where you better share in the risk and reward equation. You should be rewarded for de-risking the development before a property is marketed, or at the end of the development when the developer has remaining stock units to sell – which are costing them money. Successful investors don’t tend to buy at any other time.
Excessive Market Access Costs
You should have an understanding of the true cost of highly expensive sales and marketing campaigns. Successful investors do not buy via these because they understand who ultimately pays for it the – the investor.
Analyse, Analyse, Analyse
Don’t get carried away with the numbers– just because houses in commuter towns are popular with tenants today does not mean they will be for the long term. The long term legacy of coronavirus is yet to play out.
Because of this, when you’re running your investment analysis, make sure you use rent estimates from PRE-PANDEMIC times. Why? Because the chances are in two years time rents could have fallen back to their pre-pandemic levels.
Make sure you stress test every potential investment and play through multiple scenarios so that whatever happens, you still own a sound investment.
There may be a change in what some tenants are looking for in the short-term and there may be some movement in pricing. But cities are here to stay and whilst there may be some short-term correction in pricing at some point in the future, there is no way property prices are suddenly going to collapse or decline, the market for property rarely moves in that way.
In summary, if you’re holding property at the moment, remember exit and entry costs are high, so only sell if you want to do something else with the cash. You may be best of simply refinancing. If you’re thinking about investing today, provided you follow the principals of investing you will be able to invest successfully.
Interest to know more about the UK market? Read our latest report here.
Important notice: Proptech Pioneer and its associated companies seeks to provide investors with guides, information and tools, but we cannot guarantee this information to be accurate or perfect. You use the information at your own risk and accept no liability if you rely on this information. Proptech Pioneer is not a tax advisor, accountant conveyancer, lawyer, financial advisor or mortgage advisor. You should seek independent advice from independent professionals before making any investment decision