If you’ve been scouring for investment properties but struggling to get the business case to add up on current prices, the good news is a recent IMF report suggests prices could drop by up to 12% over the coming years. Despite the recent easing of property prices in London and the South East, particularly at the top end of the market, continued steady growth elsewhere in the UK took average sales prices to an all-time high of £230,280 last month. Those figures are based on the Halifax House Price Index and show prices are up 50% over the decade since the international financial crisis.
The recent IMF report’s 12% overvaluation headline figure referred to the world’s large, developed economies as a group and not specifically the UK. However, many analysts believe that, if anything, the overvaluation of the UK’s property market would be to the high end of the scale, putting it above any average. Speaking to The Telegraph, Société Générale global strategist Albert Edwards agreed and said he believed there is a real risk the next recession to hit the UK could burst the housing bubble.
Edwards’ opinion is that, if anything, property prices did not fall enough during the financial crisis a decade ago. The years leading up to 2008 saw huge price rises and the rise of market for investment properties as banks leant freely against small deposits, confident in the rising market. While housing prices did drop in 2008, by a record 16.2% over the calendar year, they had also risen by up to 300% over the previous decade. He argues that the low interest rates, loose monetary policy and schemes such as Help to Buy then all contributed to returning over-heated growth to the housing market over the last ten years.
For those with portfolios of investment properties the last 3 or 4 decades have been a golden era. Those only owning the family home may have made a fortune on paper but the reality is that were they to sell to the property to buy another or move into rented housing that paper profit wouldn’t amount to anything unless moving to a cheaper area. It would simply fund the necessary alternative to the property sold.
Edwards is known for his bearish outlooks and it remains to be seen if and when UK property prices might slide. Nonetheless, it would appear as though the decades of growth may be about to end. After all, median prices of houses can’t keep increasing as a multiple of median incomes, can they?