Will there be a property price rise?

Posted on: 25 January 2010 by Mark O'haire

Independent financial advisor Peter McGahan doesn’t believe the current rise in property prices will be sustained.

Q. Do you think the current rise in property prices will be sustained?

A. No. There is no real reason why residential property should increase in value at all.

Whilst I was negative on all property from 2005, in February last year I was happy to buy back into real estate investment trusts (REITs – commercial property shares), and four months ago I was happy to buy back into the physical commercial property asset.

Residential property is rather different and for me is still too overvalued. I am pretty confident we will look back two years from now at the current rise as a minor blip, driven by the current fantasy financial climate we have.

Much of the public has actually acclimatised themselves to the current interest rates and as such are enjoying a honeymoon period which is beyond comprehension.

There are three key issues that will impact house prices and they are inflation (and in turn interest rates), debt repayment and employment/wages.

The average house price in the UK peaked at £184,023 in January ’08. It hit rock bottom in April ’09 at £152,748 and today stands at an amazing £161,554. That would seem quite peculiar when we are in the midst of apparent Armageddon.

Well not really. If we look at the bank of England base rate since 1972 there are only two very short periods that interest rates have pipped briefly below 5%. It was only back in 1990 that borrowers were paying 15% for their mortgage yet today they enjoy the fantasised luxury of 0.5% base rate. In mortgage terms, that’s the difference between an average mortgage owner of £112,000 paying £1400 per month at the peak of the market as opposed to £46.60 per month now.

Clearly it is a supportive measure but it is not sustainable by any means.

The biggest threat of inflation is already upon us.

January noted a huge rise in inflation which surprised on the upside. It was the biggest monthly rise in inflation since records began.(4)

Naturally if you were a mortgage owner, you would panic at that thought.

High inflation is generally curbed by high interest rates.

However I don’t believe this is as big a threat as many would believe.

Firstly, we had VAT revert from 15% to 17.5%, then we have the colossal tax which is being levied against fuel. I filled up last week at 111p per litre. Two years ago we had hurricanes, global demand from China and all sorts of other twaddle being blamed for oil prices driving fuel to these sorts of levels.

What is the excuse today? None. Its just tax. The great thing is that the government are controlling this as opposed to market forces. No seriously, that is good. If they are controlling inflationary pressures by creating them, they can easily ‘uncreate’ them. Furthermore, it is generally believed in the economic world that the current fantasy interest world we are living in is simply a supportive measure which will disappear.

Most believe that companies will not be passing wage increases to employees and that the current shocking state of public finances will put huge downward pressure on wages and employment.

So whilst that will ease any short term inflationary fears, the reality is that 2010-2012 will be a period of global deleveraging – we will continue to try and lower our debt, both the general public and government. More on that next week.

Unemployment will rise due to cutbacks, and wages will fall.

Inflation will recede but interest rates cannot stay as they are. Higher borrowing costs will take money out of all markets and unfortunately house prices will stay flat for quite some time (3-4 years).

I pay as much attention now to the ‘marketing’ arms of ‘house price indexes' as I did in 2008 before the market went pop. Enjoy the next ten months because the twenty four after that will be about being thrifty as we emerge from interest rate fantasy land.

By Peter McGahan

Need Expert Advice?

Peter McGahanPeter McGahan is an Independent Financial Adviser and Managing Director of Worldwide Financial Planning. Worldwide has won 16 Financial Times awards in the last four years. Peter has also been named the top media IFA of the year by Unbiased.co.uk in 2009.

Peter comments regularly in major journals such as the Mail on Sunday, Irish News and Sunday Times and is a weekly columnist for FT Adviser. He has also appeared on Working Lunch and the Today programme. In addition he is an expert on international tax matters for a range of international publications.

Worldwide Financial Planning Ltd are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'

Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made. The above represents the personal opinions of Peter McGahan. All information is based on understanding of current tax practices, which are subject to change. The value of shares and investments can go down as well as up.

If you have a financial query you would like Worldwide Financial Planning to respond to, call 0845 230 9876 or email info@wwfp.net.

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