I’ve seen one or two speculative headlines lately exploring the possibility of a crash in the property market, perhaps by as much as 50%, they scream.
Well, that would be nice, wouldn’t it? If we see the cost of homes plunging to half their value now, I’d make some drastic changes to my investing strategy. I’d pile into property and property-backed investments because the great disconnection between prices and affordability will have mended. Once again, property would be affordable, and I think that would sow the seeds for the next bull market in real estate.
The two-decade property bull
I can remember the last time that prices dropped so low that property investing seemed like a no-brainer. It was around 21 or 22 years ago, and it’s etched in my memory because I did well in property in the following bull market myself. Some friends of mine recently sold a property they bought back then too. I did a quick back-of-a-fag-packet calculation and worked out that the price at which they sold was around double what they ‘should’ have made if the value of their home had merely kept up with inflation over the past couple of decades.
I think my rough sums help to illustrate that something is out of kilter in the property market. And, oh, how many of us have been willing prices to plunge. Prices have been so high for so long that a whole generation has almost been locked out of affordable property.
However, through 2018 there were signs that the property market could be topping. At the very least it seems to have paused its meteoric rise. Could 2019 finally be the year that we see prices fall in a meaningful way? Maybe. And one thing that seems to be dragging on buyer and seller confidence is the long-running Brexit saga. Of course, we’ve still got to pass the official EU leaving date of 29 March, and any extension period if one arises. Then, after that, we need to settle into the new post-Brexit environment. I think the whole Brexit-thing has the potential to dampen enthusiasm in the property market for the rest of 2019.
Two ways for affordability to be restored
Overlay the affordability issue, and it won’t take much to get the market sliding, in my view. How about recession in Europe after Brexit? Or rising interest rates making mortgages more expensive to service? It might feel like fantasy given how low interest rates have been for so long. But look at the economic indicators Britain is throwing off at the moment: massive employment, wages rising faster than inflation, and the biggest budget surplus on record in January. Indeed, the UK is trading well and things could keep on getting better, which could push inflation higher. The traditional damper for inflation is higher interest rates.
Then again, with wages on the rise, perhaps we’ll see more stagnation in the property market allowing affordability to catch up, rather than a dramatic plunge in property prices. Either way, I see the buy-to-let investment proposition as unattractive until property is affordable again. Yet there’s a massive opportunity to invest in the stock market, and the uncertainty of Brexit could be helping that situation. Dividend yields, in general, are higher than they’ve been for years, so that’s one market I would pile into.
