So one of the questions we get asked the most, is do we think it is the right time to invest.
This is asked due to the fact most clients think they can time the market perfectly, buy in the dip, max out their income for 10 years or so and then sell at a high.
In reality, this simply doesn’t happen. The reason is that people who wait, may see a reduction in the house prices but when that happens they wait as they think it will keep dropping, and before they know it back come to the prices and they have missed the boat.
Due to the fact the property market does not crash that often, we have to look at recent stock market crashes to access individuals’ mentality. Clients who make money in the stock market rarely ‘play’ the market. They, buy and hold.
Take the last stock market crash which was only 14 months ago. The market fell from over 7000 points to just under 5000. Everyone had a great opportunity to invest and make fantastic gains as it is back now over 7000 points. However, I bet the majority of people who waited still didn’t invest as they thought it would drop more.
Warren Buffet once said that if he doesn’t like an investment for 10 years he doesn’t research it for 10 minutes and that really should be your outlook in the property market. When we look at the property market we need to look at a 10 year plan. We need to focus on
- Transportation and planned new links
- Planned regeneration in the area
- Education such as Universities and Schools and what is the retention rate
- Local industry
- Typical demographic
So this brings us on to when will the property market crash?
There are always reports of the market crash. Our webinar Separating Fact from Fiction just 12 months ago made some bold statements. This was even though every paper, every advisor, agent, and worse still the Bank of England stated that the property market will crash.
- The property market WON’T crash due to COVID
- It will only crash if the fundamentals change
- The Bank of England is making wild negative reports as to when it doesn’t happen they credit themselves with saving things.
What has happened?
- The property market didn’t crash
- The fundamentals changed for the better
- The Bank of England stated they saved the day
- So back to the main question, when will the property market crash.
We know at some point that there has to be slow down. We have to look a bit deeper into the stats to find out when. To do that we always have to have in mind the fundamentals:-
- Interest rates/liquidity
It is only when these change where we see major changes in the property prices.
Take the last two major crashes, the late 1980’s and 2008.
The late 1980s had skyrocketing interest rates, therefore people simply could not afford their mortgage. In 2008 the banks simply ran out of money and we had liquidity issues.
Take the recent boom, we have had taxation changes (Stamp Duty Holiday) and now we have legislative/liquidity changes with 95% mortgages that are set to get the market a huge boost.
However, lets be realistic. The prices can’t keep increasing at the rate they have been, there has to be a slow down at some point so I wanted to break the market down slightly into 3 sections:
- Rate of growth the same as it is now
- The slowdown
- The crash
I feel the rate of return that we have seen has been phenomenal, but not surprising. It really has been the perfect storm. We have seen the first lockdown which caused pent-up demand, we have people working from home which meant individuals wanted more space (I will return to this at the end of the webinar), we have then had the Stamp Duty holiday, all of which has contributed to the huge growth we have seen over the last 6-9 months.
Another big factor is mentality.
This is a big factor which many people have overlooked, and that is FOMO (Fear of missing out). This is only really picked up by behavioural economists. An example of this is why did all the pasta, flour and toilet roll get sold out at the start of COVID, simply because the papers reported it and it was a self fulling prophecy. Once people see that house prices started to rise slightly the next batch of individuals jump on the bandwagon and push the prices up more, then the next batch, and so on.
So I still see this happening right the way through until at least October time when two things will happen. The Stamp Duty Holiday will be fully removed and the weather will change. Bad weather always affects the market and people simply don’t want to do viewings when it is wet and windy. This in my opinion will lead us onto phase 2, The Slowdown.
I want to be clear, a slowdown does not mean a crash. A slowdown is simply a reduction in what the property prices are increasing by, we know that they should still be set to increase, however, the rate of increase will be lower than it has been. I expect this to be more around the 3-4% rather than the 5-6% we are currently seeing. Then over the next two years, this will start to decrease to 2-3% per year. However, add this to your income and we will still be looking at a great investment.
I see the market being very liquid helped out by the 95% mortgages which will help 1st-time buyers move the chain along.
Now for phase 3. When will this be?
Although it is impossible to predict when, but we can predict why. Just by looking at the fundamentals, we can see that the most likely cause out of the 3 will be an increase in mortgage rates which is linked to the base rate set by the Bank of England.
Under normal, non-COVID, circumstances I would say that within the next 24 months we should typically see a slight increase in interest rates due to the threat of inflation, but, and that is a big but, we are not in normal circumstances.
The reality is, so much money has been pumped into propping up the economy from the furlough scheme, bounce back loans, and grants that the reality is there is a great deal of debt out there. By increasing interest rates too early could be absolutely disastrous. If the BoE put up interest rates too fast too early we would more than likely see a large recession which would affect the high street, the stock market, the housing market, and pretty much every sector imaginable. This is why I can’t see the rates increasing by that much if at all.
We have been at historically low rates now for close to a decade and this has given the economy the kick and consistency however, it has also put us on a track that is very difficult to get off of. The only way to do this would be to press the reset button and raise rates which the BoE in my opinion simply won’t do.
So where does this leave us, well as I mentioned I feel that there will be a great rest of the year followed by a slow down in growth but still growth will be around. Then if we are going to have a dip I would say we are looking at least 3-4 years away. Let’s keep an eye on inflation at that will be the clearest indicator yet.
Some other points to clarify:-
Property is a great tax for the government, they get more tax from BTL investors than residential clients.
More space doesn’t just mean a house with a garden. It can also mean an apartment with a roof-terrace or near a park, think of space as fresh air. We have to think that clients will be heading back into the city to work so what happens then when the commute suddenly gets too much for them.
If you have any questions please fill in your details below and we will be more than happy to help.
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